[Explained] Reasons and implications of recent overseas bank failures

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Would the two largest failures in US banking history be the caveats that rewrite another global financial crisis as global banks have lost around half a trillion dollars in market value during this year’s March? Central banks are already shouldering pain from inflation rates spiking, and while they were adopting aggressive tightening policies to mitigate inflationary pressures, they posed threats to T-bonds holders that fell in value with the increasing interest rates.

Silicon Valley Bank (SVB), the 16th largest bank in the US with $190B in deposits that were mainly uninsured by the Federal Deposit Insurance, filed for bankruptcy last month. The bank’s deposits, which tripled since the pandemic mainly by startups, were increasingly outflowing obliging the bank to sell its treasuries and securities at a loss of around $1.8 billion. Therefore, the bank called for a capital raise sparking panic in the market and resulting in the share price of the bank dropping significantly by 60 percent during the premarket session.

As a result, clients scurried to withdraw their money, pulling out a total of $42 billion in one day, leaving the bank unable to meet withdrawal requests. Consequently, the government seized the bank to be the biggest banking failure since the Great Financial crisis of 2008, and HSBC Holding plc announced that it will acquire SVB for £1.

After the SVB collapse, the second and third dominos fell, Signature Bank and Silvergate Bank. The Crypto-focused banks were already vulnerable after the recent FTX collapse that tanked the crypto market, and the deposit run was the straw that broke the camel’s back. Signature bank had almost 20 percent of its deposits as cryptocurrency, while Silvergate was more dependent on its crypto clients who comprise more than 80 percent of its deposits.

Signature Bank, the 19th-largest US Bank and the third-largest commercial real estate bank in New York City, was seized by the government as it also saw a large deposit run within days after the SVB collapse with its share plunging by around 79 percent in a month, especially since the bank had a huge share of uninsured deposits and low liquidity ratio compared to its peers.

Silvergate, on the other hand, voluntarily closed as it had a deposit run amounting to a total of around 70 percent of the bank’s deposits in less than two months, more than the withdrawals seen during the 2008 Financial Crisis. To avoid further repercussions to the economy, the US government invoked a “systemic risk exception” offering all deposits to concerned customers even beyond the FDIC insurance limit of $250k.

Not only the US banking sector has been or is feared to be affected, but rather many other sectors both domestically and internationally including the tech-based startups, commercial real estate lending sector, law firms, and the cryptocurrency market that were major clients for these banks. And indeed, we have seen Credit Suisse and Deutsche Bank struggling as well with other major banks’ shares seen slipping.

However, Credit Swiss, the 2nd largest bank in Switzerland and classified by the Financial Stability Board as a globally systemically important bank, had a rather different story and has already been struggling for years. Its share fell to record lows after posting the biggest annual loss since the 2008 crisis with regulators reviewing the bank’s financial statements, and the Saudi National Bank announced that it will not be able to provide any more funding to Credit Suisse. The Swiss government brokered a deal to sell the bank to its rival UBS for $3.2B.

Deutsche Bank, on the other hand, was affected by the SVB collapse. Despite Deutsche Bank’s strong fundamentals including high liquidity and profitability, its share price dropped by more than 25 percent in less than a month as panic abounded internationally. The decline was primarily due to the increase in the price of the Bank’s five-year credit default swaps that surged to its highest level since 2019 from below 150bp in one day to 400 bps in two days.

Credit Default swaps are derivatives that act like insurance if a company defaults on its payments. However, the German Chancellor dismissed fears over the new Credit Swiss scenario reassuring people that “there is no reason to be concerned about it,” Olaf Scholz had said in a public appearance.

Focusing on Egypt, the implications on the economy are vague, but the Central Bank of Egypt reassured that the Egyptian economy is unaffected by the collapse in a public announcement. We have seen the Egyptian Stock Market, like the global markets, tumbling during the peak of the collapse, while gold prices rose significantly both domestically and internationally as people rushed to the safe haven metal. An alarming implication, however, is that more than 40 Egyptian startups and 2 Venture Capitals had accounts in SVB, which are now susceptible to a short-term liquidity crisis.

“There will be no cheap money anymore,” said Samy ElBanna, the Managing Director of City Stone Financial Consultancy. ElBanna told Business Forward AUC commenting on the implication of the collapse that we should seize this challenging environment to strengthen our economy through higher scrutiny and regulations. “I believe that this collapse caused a liquidity crunch for the concerned startups; however, it will have positive repercussions on the Entrepreneurship climate in Egypt which is already facing many financing challenges,” he said.

“The market will capitalize on this opportunity to filter out the businesses that provide real beneficial core services to the community from those that are only concerned with making money. Overfunded startups will now be under scrutiny to determine whether their earnings after years of “overfunding” match their market valuation in 2021 and 2022,” ElBanna said.

Compared to 2008, the extent and risk of contagion brought on by complicated counterparty risk seem different in its fundamental essence. The Global Financial Crisis was primarily driven by low-quality assets with inadequate disclosure, while today, it is more of a mismanagement problem with high-quality assets, and hopefully, this time the world has learned the lesson and has the means to survive this banking crisis.

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