Log In

Reset Password

Full banking crisis unlikely amid SVB wreckage

First Prev 1 2 Next Last
Brokers watch their screens at the stock market in Frankfurt, Germany, yesterday. In background is the curve of the German stock index, DAX (Photograph by Michael Probst/AP)

The market still appears to be hunting for weakness among some smaller banks in the United States and even across Europe after US authorities stepped in to guarantee deposits at Silicon Valley Bank. This makes little sense: there should be no snowballing of runs on banks. But profit expectations could be trimmed at many firms, which could justify some — but far from all — of the price declines.

The Federal Reserve brought out its bazooka on Sunday, guaranteeing funds for any bank whose depositors might have been clicking “withdraw” over the weekend. The central bank saw clear potential for a systemic crisis in the closures of SVB and Signature Bank and acted to kill it before it got started.

In Europe, the much smaller local office of SVB in Britain was easily absorbed into HSBC in a private solution negotiated by regulators swiftly over the weekend. The chances of contagion were far smaller in Europe anyway, in part because rules designed to ensure that banks can cope with a sudden wave of deposit withdrawals apply to many more institutions than in the US.

SVB was knocked over by a combination of its highly concentrated deposit base and very large unrealised losses on Treasuries and mortgage bonds. There are no other publicly traded US banks with balance sheets that look similar to SVB’s, according to Herman Chan, of Bloomberg Intelligence.

But yesterday morning, investors continued to react as if more were equally endangered. Shares in another California-based lender, First Republic Bank, dropped more than 60 per cent in premarket trading, even though its deposit base and assets are more diversified than SVB’s. First Republic had only 8 per cent of its deposits from venture capital and private equity-related businesses and funds, versus 52 per cent for SVB, and it had a much smaller portfolio of bonds, according to analysts at UBS.

Still, investor jitters and whatever the Fed was hearing at the weekend from banks about deposit flows were enough for US regulators and the Treasury to deem that there were real risks for the wider banking system. The response was a system-wide solution, pledging cash in exchange for all Treasuries, agency debt and mortgage-backed bonds without any discount being applied to face value. That is like quantitative easing on demand for the financial system: no bank should fail for want of cash.

In Britain and Europe, there are even fewer financial firms that might look anything like SVB or Signature Bank, or Silvergate Bank, a third lender that was shuttered last week. HSBC has bought SVB’s British operations for a nominal £1 (about $1.20), taking responsibility for £6.7 billion worth of deposits and getting in return £8.8 billion of assets. HSBC’s UK bank had nearly £280 billion of deposits at the end of 2022, so SVB will be easily swallowed. HSBC said the tangible net assets of the business it has bought were expected to be about £1.4 billion. It will likely book a decent profit on the trade, which the bank will reveal in future.

This is a neat and quick solution reached because SVB UK was so small and there was little chance of any direct contagion from its problems. However, European bank stocks were still getting heavily sold yesterday.

Fearful investors were focusing on holdings of bonds that are likely a source of unrealised losses. European banks hold €1.6 trillion ($1.7 trillion) of government bonds on their balance sheets, with Italian and Spanish lenders holding the largest shares at €466 billion and €279 billion respectively, according to Bloomberg Intelligence. Given the rise in European interest rates, many of these bonds will have fallen in value in the past year, but that does not mean that banks are suddenly much more risky.

Banks lose money on these bonds only if they are forced to sell them, otherwise they will just get repaid the full value when the securities mature. They will need to sell the bonds only if they suddenly need to pay out deposits — and they would have to repay a lot. Banks in Britain and Europe are subject to stricter liquidity rules than those in the US, which means they are forced to keep a higher level of cash and easily sellable assets against their deposits.

Also, banks in Europe were already holding more cash than regulators require as they get ready to repay special low-cost loans from the European Central Bank this year, known as TLTROs, according to Moody’s Investors Services. At the same time, the only bonds that could cause banks to book unrealised losses are those that they hold at historical cost in so-called hold-to-maturity buckets. For the majority of large European banks, these bonds account for less than 10 per cent of all assets, according to analysts at Jefferies. At SVB, those holdings were 43 per cent of its assets at the end of 2022. On top of that, yesterday’s bond rally driven by the fear in markets is already wiping out the unrealised losses.

Many banks are likely to see profit forecasts cut if this episode leads to official interest rates peaking sooner. Also, the costs of bank deposits are still rising to catch up with the rate rises that have already happened, so banks’ lending margins could peak sooner rather than later, too. For banks that are already weakened, or struggling with strategy, a margin squeeze and any prolonged spell of tensions will be very unhelpful. That is likely the main reason Credit Suisse, along with other banks deemed to be among Europe’s weakest, saw its stock take another pasting yesterday. But an earnings hit for many banks is not a crisis for the entire financial system.

Paul J. Davies is a Bloomberg Opinion columnist covering banking and finance. Previously, he was a reporter for The Wall Street Journal and the Financial Times

• Paul J. Davies is a Bloomberg Opinion columnist covering banking and finance. Previously, he was a reporter for The Wall Street Journal and the Financial Times

You must be Registered or to post comment or to vote.

Published March 14, 2023 at 7:59 am (Updated March 14, 2023 at 8:56 am)

Full banking crisis unlikely amid SVB wreckage

What you
Need to
1. For a smooth experience with our commenting system we recommend that you use Internet Explorer 10 or higher, Firefox or Chrome Browsers. Additionally please clear both your browser's cache and cookies - How do I clear my cache and cookies?
2. Please respect the use of this community forum and its users.
3. Any poster that insults, threatens or verbally abuses another member, uses defamatory language, or deliberately disrupts discussions will be banned.
4. Users who violate the Terms of Service or any commenting rules will be banned.
5. Please stay on topic. "Trolling" to incite emotional responses and disrupt conversations will be deleted.
6. To understand further what is and isn't allowed and the actions we may take, please read our Terms of Service
7. To report breaches of the Terms of Service use the flag icon