After struggling to find a buyer for two weeks, on March 26, the Federal Deposit Insurance Corporation (FDIC) announced that First Citizens Bank AG would take over all deposits and loans from Silicon Valley Bank, and acquire Silicon Valley Bank at a discounted price of US$16.5 billion. Bridge Bank has about $72 billion in assets.
At first, no one expected that a piece of paper announcement would become the trigger for the closure of Silicon Valley Bank, and it would also make many regional banks in the United States crumbling. The more “burning” panic continued to ferment, spreading from North America to the European continent, triggering a crisis in the European and American banking industries.
European and American bank stocks all plummeted; Credit Suisse (hereinafter referred to as “Credit Suisse”) ended its 167-year history of independent operations; Germany’s largest lender Deutsche Bank suffered the largest intraday decline in three years, and its market value has evaporated by more than a quarter since March .
Silicon Valley Bank and Credit Suisse have made progress in their risk management, but many banks still have similar problems. The repeated swings in the policies of the US regulatory authorities have overwhelmed the market, and the Federal Reserve is also constantly raising interest rates. Several interviewees told China News Weekly that Silicon Valley Bank and Credit Suisse were the first institutions to be out of danger, but they may not be the last wave.
Silicon Valley Bank’s “quick death”
On March 7, Silicon Valley Bank, which had just announced that it had been on the Forbes annual list of the best banks in the United States for five consecutive years, was about to brew a financial storm by itself.
On March 8, Silicon Valley Bank announced that it would raise US$2.25 billion through equity financing to make up for the loss of US$1.8 billion due to the sale of US$21 billion in securities. Fearing that the bank would be in danger, many companies transferred large amounts of deposits, and Silicon Valley Bank experienced a serious run, which failed to reverse the out-of-control situation in the next two days. On March 10, Silicon Valley Bank was shut down.
Silicon Valley Bank, which has been in operation for 40 years, is the 16th largest bank in the United States and the most important commercial bank in Silicon Valley. Total assets have reached US$209 billion by the end of 2022, with deposits totaling approximately US$175.4 billion. Clients are mainly technology start-ups and venture capital institutions, and have served star companies such as Facebook and Twitter.
The market was surprised by the collapse of Silicon Valley Bank, but according to the Financial Times, the Bank of England had been watching the bank’s “concentration risk” and the link between its loan and deposit books for 18 to 24 months before the collapse of Silicon Valley Bank. The “client overlap” between the two companies, and has issued a warning to US regulators. According to the “Wall Street Journal” report on the 19th, as early as January 2019, the Federal Reserve issued a warning to Silicon Valley Bank against its risk management system, but it is not clear whether it is required to ensure that the problem is resolved. Judging from the results, these failed to attract attention.
Yang Weiwei, chief macroeconomic analyst of Guoyuan Securities, told China News Weekly that the radical asset structure of Silicon Valley Bank has become the lead of the problem. “Silicon Valley Bank’s asset structure is too concentrated, and the asset maturity is too long. In addition, the customer base on the liability side is also relatively concentrated, mainly science and technology innovation, which is a source of instability on the liability side.” In addition, Silicon Valley Bank’s internal control also has problems
. According to the British “Daily Mail”, in April 2022, Laura Izurieta, chief risk officer of Silicon Valley Bank, resigned, leaving the position vacant for up to 8 months. U.S. government data show that loans provided by Silicon Valley Bank to the bank’s executives, directors and major shareholders and their related interests before bankruptcy reached $219 million in the last three months of 2022, more than tripling from the previous month and hitting a record high. record.
The industry generally believes that the real driver of risk is high US interest rates. From March 2022 to January 2023, the Fed raised interest rates seven times in less than a year, with a cumulative rate hike of 425 basis points.
”Under the environment of continuous interest rate hikes, there is a high probability that the allocation of banks in U.S. debt will be inflated losses. Silicon Valley Bank cut a part of U.S. debt and took the lead in cashing in part of the losses. Coupled with the loss of confidence, once panic is caused, the resulting The run on the bank will greatly increase the required margin ratio. From this point of view, there are similarities between the failure of Silicon Valley Bank and the Lehman Brothers back then.” Yang Weiwei said.
According to the FDIC, starting from March 13, all deposits in Silicon Valley Bank will be repaid, and each depositor can obtain insurance of up to US$250,000. This means that the portion over $250,000 will not be covered. However, most of SVB’s depositors are start-ups that have placed far more than that in the bank.
The survival crisis of these companies has attracted the close attention of venture capital institutions. According to foreign media reports, on March 11, about 125 venture capital firms signed a statement calling for limiting the impact of the bank’s collapse and avoiding a more devastating situation for technology companies.
The pressure worked. On the evening of the 12th local time, the U.S. Treasury Department, the Federal Reserve, and the FDIC issued a joint statement on the collapse of Silicon Valley Bank. In addition to announcing that New York City-based Signature Bank has been closed, it said depositors will be able to withdraw all deposits starting Monday, March 13. Any losses related to the SVB bankruptcy will not be borne by taxpayers. But shareholders and some unsecured bondholders will not be protected.
”This statement should stem the deposit run at Silicon Valley Bank. In addition, this statement will also help to contain similar shocks that may be faced by other small and medium-sized banks in the United States. From this point of view, Silicon Valley Bank becomes the second Lehman Brothers and even triggers The possibility of the U.S. financial tsunami has dropped significantly,” Zhang Ming, deputy director of the Institute of Finance and Economics at the Chinese Academy of Social Sciences, told China News Weekly.
Credit Suisse’s internal and external troubles
The mess of Silicon Valley Bank has not been cleaned up yet, and Credit Suisse has also come to “join in” the fun.
On March 14, local time, Credit Suisse stated in its 2022 annual report that “significant deficiencies” were found in the reporting procedures for fiscal years 2022 and 2021, which were related to the failure to design and maintain effective risk assessments in financial statements. And said that in the past two years, “the group’s internal control over financial reporting has not worked, and management has therefore determined that our disclosure controls and procedures are invalid.”
These issues were identified by PwC. The agency audited Credit Suisse’s 2022 financial statements. According to a separate statement issued on March 21, Credit Suisse’s management failed to design and maintain effective controls over the completeness of the classification and presentation of non-cash items in its statement of cash flows.
Internal troubles have been put on the table, and “foreign troubles” have not been absent.
On March 15, Ammar Al Khudairy, President of the National Bank of Saudi Arabia, the largest shareholder of Credit Suisse, told the media that he would no longer inject capital into Credit Suisse. Because once the shareholding ratio reaches 10% and above, it will face different regulatory requirements than before. Currently, the National Bank of Saudi Arabia’s stake in Credit Suisse has reached 9.88%.
Affected by multiple factors such as the collapse of Silicon Valley Bank in the United States, internal control problems at Credit Suisse, and the refusal of major shareholders to continue to inject capital, panic has intensified.
On March 15, Credit Suisse’s stock price closed at 1.7 Swiss francs per share, a drop of 24%, which was the largest single-day drop since Credit Suisse went public. At the same time, the one-year credit default swap (CDS) of Credit Suisse bonds soared from 835 basis points on the 14th to around 1,000 basis points, reaching the highest level in history, about 20 times the price of UBS’ one-year CDS , 10 times that of Deutsche Bank. The higher the price of CDS, the more serious investors worry about its default, and the greater the probability of default.
On the evening of the 15th, the Swiss National Bank (SNB) and the Swiss Financial Market Supervisory Authority (FINMA) issued a joint statement on market uncertainty, pointing out that the Swiss National Bank will provide liquidity support to Credit Suisse if necessary. On the 16th, Credit Suisse stated that it plans to provide full collateral with high-quality assets and borrow up to 50 billion Swiss francs from the Swiss National Bank.
After Credit Suisse failed to save itself for three days, on March 19, UBS finalized the acquisition of Credit Suisse, and its nearly 167 years of independent operations will become history. According to UBS announcement, this is an all-stock acquisition transaction. Shareholders who hold 22.48 shares of Credit Suisse will receive 1 UBS share, equivalent to 0.76 Swiss francs per share, with a total price of 3 billion Swiss francs (about 3.2 billion U.S. dollars). Based on the closing price on the 17th, the market value of Credit Suisse is about 7.4 billion Swiss francs, which is equivalent to UBS “winning” Credit Suisse with a 40% discount.
However, after all, as an old banking giant founded in 1856, the brand effect of Credit Suisse is still strong. According to a report by the Swiss “Finance and Economics” on the 24th, UBS will retain the Credit Suisse brand for at least three to four years.
Credit Suisse is one of the 30 Global Systemically Important Banks (G-SIBs) at Tier 1. Its assets will be about $580 billion by the end of 2022, more than twice the size of Silicon Valley Bank. However, in the past ten years, Credit Suisse has been deeply involved in a series of scandals and turmoil, and even involved in criminal cases.
In 2021, Credit Suisse will be hit continuously. The bankruptcy of financial technology company Greensill Capital caused Credit Suisse to freeze the US$10 billion fund holding its bonds, and finally recovered only US$7 billion. Hedge fund Archegos Capital’s liquidation hit “the largest single-day loss in history”, and Credit Suisse lost about US$5.5 billion. Two major investment failures led to serious losses in Credit Suisse’s performance. In 2021, Credit Suisse’s net loss was 1.626 billion Swiss francs, the first loss since 2018. In addition, in 2022, Credit Suisse became the first major bank in Swiss history to be convicted in a criminal case for allegedly assisting criminal clients in money laundering.
In order to reverse the decline and regain its strength, Credit Suisse changed its management. In July 2022, Ulrich Koerner was appointed as the CEO of Credit Suisse. However, the latest annual report shows that the bank’s net loss attributable to shareholders in 2022 is 7.293 billion Swiss francs, which is the bank’s worst annual loss since 2008 and the second consecutive year of losses. Credit Suisse expects further “substantial” losses in 2023.
”Credit Suisse’s own problem is that related businesses have suffered relatively large losses, and there are also penalties for business non-compliance, but these things have not been well resolved. Coupled with the external environment that continues to raise interest rates, liquidity With tighter requirements and rising financial costs, it will become more and more difficult to deal with, and you will eventually have to expose risks.” said Zhao Xijun, co-dean of the China Capital Market Research Institute of Renmin University of China.
In terms of the most prominent asset loss problem of Credit Suisse, although Credit Suisse announced a series of reform plans in October 2022, including restructuring its investment bank and increasing capital. But the phenomenon of asset loss is still serious. According to Credit Suisse’s 2022 annual report, more than 120 billion Swiss francs (about 129.9 billion U.S. dollars) of assets flowed out of Credit Suisse last year, reaching 110.5 billion Swiss francs in the fourth quarter alone. Among them, more than three-quarters of asset outflows occurred in core businesses such as asset management.
The “Wall Street Journal” once mentioned that after the exposure of the risk, Credit Suisse faced a daily outflow of client funds of up to US$10 billion. Fund net outflows exceeded $450 million.
U.S. saves depositors, Switzerland bails out banks
In addition to ensuring that the deposits of Silicon Valley Bank depositors will not be affected, on the 12th, the Federal Reserve also announced a rescue plan that can improve bank liquidity by providing additional funds to help ensure that banks have the ability to meet the needs of all depositors. Additional funds will be released through the BTFP (Bank Term Financing Program).
Specifically, BTFP provides loans for up to one year to banks, savings associations, credit unions and other eligible depository institutions, and allows institutions to use U.S. Treasury bonds, agency bonds and mortgage-backed securities and other eligible assets as collateral.
Notably, collateral provided by depository institutions will be valued at face value. “This is equivalent to no mortgage rate, how much assets can be mortgaged, how much money can be loaned out. Depository institutions can obtain more funds than market financing, and the financing policy has been greatly relaxed.” Yang Weiwei said.
Yang Weiwei further stated that the Fed only charged interest rates symbolically to provide banks with liquidity in order to prevent the loss of depositors’ deposits. The BTFP is different from other monetary instruments in that its size is not determined by the monetary authorities, but by the needs of banks. A bit like my country’s Standing Lending Facility (SLF) monetary instrument.
Compared with the bailout of the 2008 financial crisis, Yang Weizhi believes that the Fed is relatively restrained this time. “There is no large-scale rescue plan, and BTFP is also directional, which may be related to the fact that the Fed is still more afraid of inflation.” Unlike the
US regulators who quickly shut down Silicon Valley Bank, Switzerland United tried its best to match up with multiple departments to support UBS’s acquisition plan. It is reported that the acquisition of UBS and Credit Suisse was realized with the support of the Swiss Federal Government, the Swiss Financial Market Supervisory Authority and the Swiss National Bank.
The Swiss National Bank said that in addition to unrestricted use of existing lending facilities to obtain liquidity, UBS and Credit Suisse can also obtain 100 billion Swiss francs (about 108 billion U.S. dollars) in liquidity from the Swiss National Bank under emergency regulations. Sexual assistance loans, backed by a federal government default guarantee. At the same time, the Swiss government will also provide a guarantee of up to 9 billion Swiss francs to deal with the potential losses to UBS that may be caused by the acquisition of Credit Suisse assets.
Zhao Xijun believes that judging from the current response of European and American regulatory authorities, they are all taking measures to try to control the changes in the situation, but the measures are different.
”The U.S. approach is to abandon the bank and protect the interests of depositors. The purpose is to give confidence to the market and not cause panic. Switzerland is letting another big bank acquire Credit Suisse, which is in trouble. In fact, it hopes to keep the bank, but the acquisition In the process, the valuation of Credit Suisse has been greatly reduced, which is actually sacrificing the interests of investors and shareholders. Through low-cost acquisitions, risks are prevented from spreading.” Zhao Xijun further stated.
The valuation of Credit Suisse was lowered to a 40% discount for the acquisition, and the discount was obviously borne by the original shareholders of Credit Suisse. At present, the top two shareholders of Credit Suisse are the National Bank of Saudi Arabia and the Qatar Investment Authority.
In addition, Credit Suisse Additional Tier 1 bondholders will also be “sacrificed”. The Swiss Financial Market Supervisory Authority said on the 17th that after the Swiss government supported UBS’s acquisition of Credit Suisse, in order to increase the core capital of Credit Suisse, Credit Suisse’s AT1 bonds with a face value of about 16 billion Swiss francs (about 17.2 billion U.S. dollars) will be completely written down. , Private investors lost all their money. This would be the largest writedown in the $275 billion AT1 market in Europe.
This move caused strong dissatisfaction among Credit Suisse AT1 bondholders, who believed that it violated the order of repayment of shares first and debts in the “Basel Accord III”. Some foreign media said that US distressed debt investors and corporate lawyers are preparing to sue the Swiss government for the write-down event and priority payment to shareholders. However, judging from the design of Credit Suisse AT1 bond terms, there is little hope of recovering losses.
AT1 bonds are a common form of contingent convertible bonds. A “surprise event” or “viability event” occurs during the life of the bond, which is subject to a write-down.
A reporter from “China News Weekly” checked the issuance terms of Credit Suisse’s AT1 bond and found that the common measures for capital adequacy ratio have expired, and it is necessary to write down primary and secondary capital instruments, or obtain special support from government departments to improve capital adequacy ratio. , which means that a “viability event” occurred.
As FINMA said in a statement on March 23, since Credit Suisse received a federally guaranteed special liquidity assistance loan on the 19th, the contractual conditions of the AT1 facility issued by the bank have been met — Extraordinary support from the government triggers a ‘viability event’ and the AT1 bond is fully written down.
While there is a clear rationale for this move, the spillover effects are already evident. According to the Financial Times, some of Asia’s largest banks may suspend AT1 bond sales. The European Central Bank also expanded its exposure survey. Find out whether the bank and its customers are at risk of losses due to the Credit Suisse AT1 bond write-down event.
Will there be another one?
At present, Bridge Bank has undertaken almost all deposits and assets of Silicon Valley Bank, and is providing financial services to its depositors. The deposits of many Chinese listed companies have all been withdrawn.
The sale of Silicon Valley Bank has also been confirmed. Since its collapse, the FDIC has been looking for a buyer for Silicon Valley Bank, and the sale strategy has changed from the original package sale to split sale. First Citizens Bank has rich experience in acquiring bankrupt banks. Since 2009, it has acquired more than 20 bankrupt banks and is one of the largest buyers of bankrupt banks in the United States.
As for Credit Suisse, it is reported that the Swiss authorities and UBS are striving to complete the transaction with Credit Suisse by the end of April at the earliest. Jordan, president of the Swiss National Bank, said on the 23rd that both parties are trying their best to make the acquisition a success, and the next two weeks are crucial.
The risk of taking the lead seems to have been suppressed. However, the international rating agency Moody’s warned in a report on the 23rd that the possibility of the banking turmoil that began with the collapse of Silicon Valley spreading to a wider range still exists.
Federal Reserve Chairman Powell said at a press conference on the 23rd that the tightening of financial conditions after the collapse of Silicon Valley banks may slow down economic growth. On the 26th, European Central Bank Vice President Guindos said, “The question now is how the U.S. banking system and the Credit Suisse incident will affect the euro zone economy.” These voices tried to make the market face up to a real problem: the shock is not over so soon.
Zhang Ming said that the bankruptcy of Silicon Valley Bank is not just an isolated case. It has exposed the common hidden dangers of several small and medium-sized commercial banks in the United States: they all have typical asset-liability maturity mismatches, and the asset side has invested heavily in various high-grade credit bonds in the United States. The Fed’s continuous interest rate hikes and balance sheet reductions have led to large book losses in the related investments of these small and medium-sized banks. Once these losses are realized, a large number of small and medium-sized banks will face the dilemma of sharply shrinking capital or even returning to zero.
For example, First Republic Bank’s “held-to-maturity” bonds accounted for 80% of its total investment, leaving a liquidity ratio of only 4%. Since the collapse of Silicon Valley Bank, First Republic has had about $70 billion in customer withdrawals, according to the Wall Street Journal. On the 16th, 11 major banks led by JPMorgan Chase jointly deposited $30 billion in First Republic Bank to regain confidence in the bank.
In addition, U.S. Treasury Secretary Yellen’s wavering policy on deposit guarantees also dampened market confidence.
Initially, Yellen had said that uninsured deposits would only be insured if “there would be systemic risks and significant economic and financial consequences”. On the 21st, it changed to “If the banking crisis worsens, the government is prepared to provide further guarantees for deposits.”
A day later, Yellen claimed that she would not consider extending the scope of federal deposit insurance to uninsured deposits. The speech shocked the market. U.S. stocks closed down across the board that day, and bank stocks that had rebounded before all fell back. On the 23rd, Yellen changed her words again, emphasizing that “if necessary, I am ready to take additional actions.”
Some people in the banking industry told China News Weekly that Yellen’s erratic attitude shows that the regulatory authorities have not yet figured out how to end the crisis, and also reflects that the current situation is still relatively complicated.
Investors continued to worry about the prospects of banks, and Deutsche Bank, 400 kilometers away from the headquarters of Credit Suisse, quickly became an outlet for market panic. Its credit default swaps hit the largest single-day increase on the 23rd and rose to 222 basis points on the 24th. Although it fell back to 208 basis points later, it was still the highest level since the end of 2018.
In order to alleviate the market’s concerns about Deutsche Bank, on March 24, German Chancellor Olaf Scholz took the lead in endorsement, saying that there is no reason to worry about Deutsche Bank. European Central Bank President Christine Lagarde later also said that banks in the euro zone are resilient. If necessary, the ECB will provide liquidity support. Even so, on the same day, Deutsche Bank’s share price finally fell 8.53% to close at 8.54 euros. It is worth noting that the stock price of Deutsche Bank has fallen for three consecutive trading days, and its market value has fallen by more than 26% since March.
Many interviewees told China News Weekly that it is still uncertain whether Deutsche Bank will “explode thunder”, but the possibility still exists.
”The real problem at the moment may still be the high interest rate environment, which is exactly the same as in 2008. Every bank in the United States is losing money in the allocation of US debt. In this case, even if the risk of Silicon Valley Bank is under control, if the Fed continues to raise interest rates , U.S. debt will suffer further losses, and there will be a second batch of banks facing the same situation as Silicon Valley Bank.” Yang Weiwei said.
Previously, the market had been looking forward to whether the Federal Reserve might stop raising interest rates or reduce the rate of raising interest rates due to the outbreak of the Silicon Valley banking crisis. Yang Weiwei believes that in a rational state, when risks first appear, getting rid of the high interest rate environment should be the most root solution to the problem.
But on March 22, the Federal Reserve’s Federal Open Market Committee (FOMC) announced that it would raise the target range of the federal funds rate by 25 basis points to between 4.75% and 5%, the highest level since October 2007. This is the ninth consecutive rate hike by the Fed since last March.
Zhang Ming believes that the effect of this round of interest rate hikes by the Federal Reserve is continuing to emerge. “Steep interest rate hikes will cause the market value of bond assets to shrink significantly. Many financial institutions are priced at historical cost, and only when they sell related assets will they expose potential losses, causing investors to panic, and institutions may be run on.”
It is worth noting that the Fed statement on the 23rd no longer includes the phrase “it is appropriate to continue to increase interest rates” that has been in every policy statement since March 2022. Yang Weiwei believes that regardless of whether interest rates will be raised again, it is relatively certain that this round of U.S. interest rate hikes is coming to an end.
However, Zhang Ming said that the pace and extent of interest rate hikes in 2023 may still exceed market expectations again. “The bankruptcy of Silicon Valley Bank will weaken the Fed’s next monetary tightening speed, but it will not change the direction of its tightening. There is still room for a cumulative rate hike of about 50 basis points this year.” Fed Bullard also said on the 26th that the Fed’s 2023 The annual interest rate is expected to increase to 5.625%.
Zhao Xijun reminded that these banks that have been in danger have already appeared in the past few years. With the current tightening of market liquidity, more banks may face the same situation, and risks will continue to be exposed.
Zhang Ming also told China News Weekly that Silicon Valley Bank and Credit Suisse may not be over yet. Deutsche Bank and First Republic Bank will still face great pressure in the future, and there may be new institutions that gradually expose problems.
Zhang Ming further stated that the asset price adjustment represented by the U.S. stock and bond markets may not be over yet, and investors in the U.S. and other countries may continue to suffer large-scale losses. Diversification of assets at a lower cost through various means is still a top priority for Chinese investors.