Yesterday was something of a high news day – a usually headlining Budget speech has been upstaged by yet more shenanigans on global stock markets.
Recent headlines will have told you the story of last week’s collapse of a US Bank that specialised in lending to the technology sector, particularly ‘start-up’ companies.
Silicon Valley Bank (SVB) had over the last couple of years elected to invest a large amount of its bank deposits in long-term U.S. treasuries and mortgage-backed securities. However safe this seemed at the time, as we know, interest rate rises decrease the value of any fixed interest security.
The bank was likely technically insolvent for months, because although holding the bonds to maturity would have returned capital, that was years in the future. If they needed capital earlier, they wouldn’t be able to liquidate their bond assets without a large loss. When the tech sector started to contract as inflation accelerated, many bank customers – mainly technology companies’ - withdrew money as venture capital started drying up. As SVB didn't have the cash on hand to liquidate these deposits, they started selling their bonds at ‘fire sale’ prices, which caused distress to customers and investors.
On March 6th SVB announced they needed to raise even more capital, and people became alarmed. Word spread, and fearing a run on the bank customers started to withdraw money in waves – somewhat like the collapse of UK’s Northern Rock in 2007. SVB's share price plummeted by 60% on the following day.
I can confirm our active portfolios have NO exposure to SVB.
This event has led to questions about the health of the wider banking industry. Banks already under pressure for other reasons, have now become investors’ new candidates for trouble.
Credit Suisse has stumbled from one scandal to another in recent years including allowing drug dealers to launder money, entanglement in a Mozambique corruption case, and a massive leak of client data to the media. Social media speculation drove Credit Suisse customers to withdraw over €111 billion in Q4 2022. The rumours sparked a selloff in the shares, followed by a series of compliance failures that have cost the bank dearly.
As part of a recovery plan, Credit Suisse planned to sell off various parts of its business, and to concentrate on Wealth Management. However, the impact of the SVB collapse has caught weaker banks in a very exposed position, and its major shareholder, the Saudi National Bank has declared it will not support the bank with any further capital injections – this has merely added fuel to the fire and Credit Suisse’s share price was down over 25% at one point yesterday morning, but as I write has clawed back a third of those falls. The Euro Stoxx banks index was down 7 per cent by mid-morning, with a knock-on effect on main indices in Europe and the UK.
We hold NO exposure to Credit Suisse shares in our actively managed portfolios.
Although more skeletons may emerge from their respective cupboards, we do not see a systemic issue here to equate to 2007-8. SVB is an outlier; it had apparently operated without a Chief Risk Officer between April last year and January this year and it is unclear how the business managed its risk. The bank is now under SEC and US Justice Department investigations.
These days banks in general are better capitalised, and indeed regulated (although this might be strengthened) and few will be as over exposed to long-bonds as SVB. The US Federal Reserve has put a funding backstop in place for all banks, to stop them needing to be forced sellers of assets should pressure on deposits increase. The authorities are protecting all depositors, including uninsured deposits, at both SVB and Signature Bank, which also ran into difficulty over the weekend. HSBC announced that it will be buying SVB’s UK subsidiary.
These are decisive actions in a short space of time and should help limit any contagion effect. What we’re seeing now is less of a panic and more of an incident-inspired and exaggerated reassessment of banks’ likely profits – having to pay higher interest to attract depositors’ money, while a weaker economy or outright recession dampens demand and the propensity to borrow means banks make less money.
Meanwhile diversification benefits have (at last) returned, as recent events have seen bond prices rocket as yields have plummeted. On Monday we saw the deepest one-day fall in the 2-year US Treasury yield (61 basis points) since 1982. We also witnessed the greatest one-day drop in the 2-year German bond yield (41 basis points) since Bloomberg’s records began, and the fastest steepening in the US 2-year/10-year yield curve (48.2 basis points) in the last 40 years. This will have been a strong buffer in our lower-risk investors’ portfolios.
We will continue to keep you informed of any major developments, but to reiterate, we do believe that this issue is temporary and will blow over sooner rather than later. The direction of inflation and interest rate policy remain the more important issue for us, rather than the murkier parts of the banking system.
Until next time stay well