Let's start this story from the beginning. There is a guy called John. John is super popular and now, John wants to throw a party. But John wants to be different. So he invites only the bros. His wife says, won't it be better if everybody came along? He said, nyah. Just the 'bros'. Now he throws a crazy rooftop party on the 30th floor maybe. Now, he wants to go crazier. So he has the railings removed so that everyone can get really cool instagram shots and all that. But, then the weather starts getting windy. But, John says the party must go on.
Now, the alcohol starts running dry. A party without alcohol is just a gathering. Right? John comes and says, "Hey I just ordered more alcohol and it's on it's way. But if anyone wants to chip in for a 10 min delivery, it'll be great." Now the panic starts. And the panic spreads. It spreads fast. Everybody runs to have the last sip of alcohol from the bar. In this, they stampede John and he falls off the building. He was hoping someone to come and save him but nobody did. He fell and he died.
Here John is of course Silicon Valley Bank. The alcohol is of course liquidity. The bros are founders and VCs. So, that's exactly what happened with silicon valley bank. They offered high interest rates to the depositors. They served as a banker only to the startups, which is anyways a bad idea because risks are not being hedged properly. SVB invested in held till maturity bonds and now, they can't sell it off before 30 years or so. Now, FED suddenly increases the interest rate. So, those bonds lose value overnight because now it is better to just keep the money at FED. What SVB does is, it sells off its $21B portfolio filled with assets other than held till maturity bonds. That sparked the first fear. SVB, which was considered to be so liquid had to sell off its portfolio was a major red flag. Y Combinator advised all its invested companies to pull out their deposits. As this started happening, their liquidity decreased further and finally they had to declare insolvency.
The global banking sector has been shaken by a series of bank failures and mergers in the past two weeks, raising questions about the stability and resilience of the financial system. The most dramatic event was the state-backed takeover of Credit Suisse by UBS on Sunday, which marked the end of a long-standing rivalry between Switzerland's two largest banks and sparked market volatility.
Credit Suisse, which had about $1.1 trillion in assets in 2021, was one of the world's largest and most influential banks, but it had been struggling with a series of scandals and losses for years. The bank's troubles came to a head earlier this month, when it reported a $4.7 billion loss from its exposure to Archegos Capital Management, a family office that collapsed after making risky bets on stocks. The loss wiped out Credit Suisse's entire profit for 2020 and forced the bank to raise capital and cut its dividend.
The Swiss regulator, FINMA, intervened to broker a deal with UBS, which agreed to buy Credit Suisse for 3 billion Swiss francs ($3.23 billion) and assume up to $5.4 billion in losses. The deal was seen as a way to prevent a systemic crisis and preserve Switzerland's reputation as a financial hub. However, it also raised concerns about the creation of an even bigger "too big to fail" institution that could pose a threat to financial stability in the future.
The merger also had a controversial twist: under the deal, 16 billion Swiss francs ($17 billion) of Credit Suisse's Additional Tier 1 debt, a type of hybrid bond that can be converted into equity or written off in times of stress, was marked down to zero on the orders of FINMA. This meant that bondholders, who had expected to receive some recovery in case of default, lost all their investments, while shareholders kept about 3 billion francs ($3.2 billion) of their stake. This decision reversed the usual hierarchy of creditor claims and outraged many investors who felt they had been unfairly treated.
The fallout from the Credit Suisse takeover was felt across global markets, as investors reassessed the risks of holding bank debt and equity. Some bank stocks rose on hopes of consolidation and higher profitability, while others fell on fears of contagion and regulatory scrutiny. Bank bonds also suffered, especially those issued by European lenders that have similar structures to Credit Suisse's AT1 debt.
The turmoil in the banking sector was not limited to Europe. In the US, two banks that specialized in serving technology and cryptocurrency companies also collapsed earlier this month: Silicon Valley Bank (SVB) and Signature Bank. Both banks had suffered heavy losses from their exposure to crypto assets, which plunged in value amid regulatory crackdowns and market volatility. The Federal Deposit Insurance Corporation (FDIC) took over both banks and sold their deposits and loans to other lenders.
Another US bank that faced trouble was First Republic Bank, a regional lender based in San Francisco that also catered to tech clients. The bank received a $30 billion lifeline from a consortium of top US banks, including JPMorgan Chase, Bank of America and Wells Fargo, after it faced a liquidity crunch due to deposit outflows and margin calls. However, the rescue package failed to calm investors' nerves, as First Republic's share price plunged nearly 50 percent amid speculation that it could need another bailout or face closure.
The recent events have raised questions about whether global banking is headed for another crisis similar to the one that erupted in 2007-08 following the collapse of Lehman Brothers. While some economists have cautioned against drawing such comparisons, citing the stronger capital buffers and regulatory reforms that have been implemented since then, others have warned that the banking sector still faces significant challenges and vulnerabilities that could trigger more turmoil in the future.
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Source: (1) Credit Suisse, SVB, Signature Bank: What you need to know. https://www.reuters.com/business/finance/ubs-mulls-credit-suisse-takeover-amid-us-bank-fallout-what-you-need-know-2023-03-19/ Accessed 22/03/2023.
(2) Credit Suisse and SVB: Is global banking in crisis?. https://www.aljazeera.com/economy/2023/3/21/credit-suisse-and-svb-is-global-banking-headed-for-crisis Accessed 22/03/2023.
(3) Credit Suisse faces a crucial weekend with its future in balance amid .... https://www.cnbctv18.com/business/credit-suisse-crucial-weekend-ubs-merger-talks-emergency-liquidity-us-fed-svb-first-republic-16203891.htm Accessed 22/03/2023.
(4) UBS-Credit Suisse Merger May Lead to Massive Layoffs. https://www.thestreet.com/investing/ubs-credit-suisse-merger-may-lead-to-massive-layoffs Accessed 22/03/2023.
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