Quilter Cheviot

Recent banking troubles not indicative of systemic weakness

An in-depth look at the banking sector following its recent, high-profile troubles, by William Howlett, Equity Research Analyst at Quilter Cheviot

March has been the most tumultuous month for the banking sector since the height of the 2007-08 financial crisis with the collapse of Silicon Valley Bank and UBS swooping for an emergency takeover to prevent Credit Suisse befalling a similar fate.

Although recent headlines have led to panic and turmoil in financial markets, it is important to keep things in the correct perspective and thus far the issues appear to be specific to Silicon Valley Bank and Credit Suisse, rather than reflective of a systemic crisis due to widescale irresponsible lending, inadequate capital and opaque interdependencies like we had 15 years ago.

In the case of Silicon Valley Bank (SVB) its downfall can be traced back to the investment boom fuelled by easy money following the outbreak of the Covid-19 pandemic and is essentially a prime example of interest rate risk mismanagement. Compared to traditional banks SVB’s deposits were lumpy, greater in size and lower in number, often coming from corporate treasurers in the tech sector as opposed to retail savers. This meant the bank’s liabilities were flighty and when fledgling tech companies ran into difficulties, as many would have last year due to the changing macroeconomic environment, deposits were withdrawn.

With the economy so awash with money SVB received more deposits that it could lend out, taking in almost US$130bn in new deposits in 2020 and 2021. This led to much of the money being invested in long-term US government-backed bonds, seen as practically risk free and still offering a positive interest rate spread due to the deposits costing next to nothing. This changed dramatically after the Federal Reserve embarked on rapidly increasing interest rates following the return of the spectre of inflation early last year, leading to sharp moves lower in bond prices and substantial paper losses on SVB’s holdings…

Image to show we are a member of the FT Top 100 Financial Advisers 2023