According to a March 13 report, published on the Social Science Research Network entitled “Monetary Tightening and US Bank Fragility in 2023,” 186 American banks are at risk of suffering a similar fate as Silicon Valley Bank (SVB) due to rising interest rates and a high proportion of uninsured deposits.
The researchers, from Stanford and Columbia Universities as well as the University of Southern California and the Kellogg School of Management, speculated that should each bank experience a run, similar to that of SVB, they would fail and that the Federal Deposit Insurance Corporation (FDIC) would run out of money attempting to insure the losses.
“Our calculations suggest these banks are certainly at a potential risk of a run, absent other government intervention or recapitalization,” the researchers claim, adding that, “Even if only half of uninsured depositors decide to withdraw, almost 190 banks are at a potential risk of impairment to insured depositors, with potentially $300 billion of insured deposits at risk.”
The researchers believe that if uninsured deposit withdrawals cause even “small fire sales” a substantial amount of banks are at risk.
The banks in question have significant exposure to risk due to the amount of government bonds and mortgage backed securities on their books; assets that were negatively impacted by the Federal Reserve’s recent aggressive interest rate hikes.
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In the case of SVB, many of the bank’s assets were long-term government bonds, assets that are traditionally thought of as sound long-term investments. However, the bank was too heavily invested in long-term bonds that had a maturity of more than 10 years.
SVB was forced to sell many of its bonds to meet depositors’ demands for cash resulting in a $1.8 billion loss, which, once communicated, panicked other depositors who withdrew their money, resulting in the bank’s failure.
The researchers concluded that their calculations “suggest that recent declines in bank asset values very significantly increased the fragility of the US banking system to uninsured depositor runs,” and underscores the importance of financial institutions diversifying their funding sources to ensure stability amidst market fluctuations.
Credit Suisse fails, sold to UBS
On March 19, across the Atlantic, a deal to sell banking giant Credit Suisse to its Swiss rival, UBS, was struck. The bank has been in operation for 167 years.
UBS agreed to buy the struggling bank for more than $3 billion in a deal brokered by Swiss regulators after Credit Suisse’s share price plummeted last week worrying investors who believed the bank was at risk of defaulting on its debt. The fear led to depositors pulling their money from the bank.
Colm Kelleher, UBS’s chairman, said the acquisition was “an emergency rescue,” Business Insider reported.
According to Credit Suisse, the bank operates in some 50 countries across the globe and employs more than 45,000 people, with 16,000 of those staff working in Switzerland and more than 5,000 in London.
An employee of Credit Suisse told Business Insider that Credit Suisse board members looked “absolutely wrecked” during a video call held with employees on Monday morning in an attempt to quell anxiety over the takeover.
Ulrich Körner, Credit Suisse’s CEO, said the board worked “day and night” over the weekend to secure the deal, according to the employee.
The employee, who wished to remain anonymous said that “The vibe was very much ‘this is very rushed, nobody has a clue what happens next, it’s basically up to UBS but sit tight’.”
Staff were told that the transition could take upwards of six months and that in the interim they are to focus on the client and to support each other during these “difficult” times.
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European banking shares up
A wider contagion appears to be unlikely at this point as European banking shares rallied Monday morning following sharp declines.
After starting the day in the red, the FTSE 100 was up 1 percent or 75 points in afternoon trading. London-listed banking shares also recovered following a heavy sell-off earlier in the trading day, however Standard Chartered and Barclays were down, 2.5 percent and 1.8 percent respectively.
UBS shares rose by two percent while Credit Suisse’s shares plummeted by 56 percent.
European central banks issued statements intended to quell investor anxiety over a wider crisis with the Bank of England issuing a statement Monday saying, “The UK’s bank resolution framework has a clear statutory order in which shareholders and creditors would bear losses in a resolution or insolvency scenario,” while an official spokesperson of the Prime Minister’s office told reporters that the British banking system, “remains safe and well capitalized.”
German chancellor, Olaf Scholz, welcomed action by Swiss authorities and made comments intended to ease anxiety as well. “The situation is not comparable to 2008-09,” his spokesperson said, adding that “The German banking system is well positioned,” The Guardian reported.
So far, investor confidence appears to be holding however job losses are expected with Mark Yallop, UBS’s UK former chief executive telling BBC radio that job losses were “inevitable.”
“I would imagine those would be concentrated in the risky investment banking business at Credit Suisse which is partly the cause of the problems the firm is experiencing,” he said.
Central banks including the U.S. Federal Reserve, the Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank and the Swiss National Bank all announced that they will be increasing liquidity through daily U.S. dollar swaps to shore up resilience amidst a volatile environment.
