The banking crisis – what happens next
Silicon Valley Bank’s (SVB) and Credit Suisse’s failures have led to fears of a widespread financial crisis akin to the 2008 Great Financial Crisis.
However, Kokkie Kooyman, finance sector expert at Denker Capital, dismisses these fears and says South Africa’s banking system will likely weather the storm better than most.
The collapse of SVB in March 2023 was the second-biggest banking failure in the history of the United States and the largest since the 2008 crisis.
SVB’s collapse followed that of Silvergate Bank and precipitated the failure of Signature Bank, the third-largest bank failure in US history, with First Republic Bank also coming under stress.
The contagion spread to Europe, with Credit Suisse being stressed and eventually sold to its rival, UBS.
Deutsche Bank came under pressure next, with regulators and politicians attempting to restore public confidence in the banking system.
These collapses and stress have led to fears of another Great Financial Crisis similar to 2008, with systemically important banks, such as Deutsche Bank, coming under pressure.
The collapse of Silicon Valley Bank
SVB, the 16th largest bank in the US by deposits, collapsed in less than 36 hours in a run on the bank.
The bank was founded in 1983 to serve startup technology companies, making it uniquely vulnerable to a run on the bank as its depositors were highly concentrated and short-term oriented.
During the pandemic, SVB’s deposits tripled to $189 billion in two years as companies ceased investments and acquisitions, preferring to keep cash on hand.
The bank used most of its new deposits to purchase tens of billions of dollars worth of long-term US Treasury bonds. Its bond portfolio grew $100 billion in 2021 alone.
These are typically safe investments and were a boon for SVB, with 2021 being its most profitable year on record.
However, when the Federal Reserve began raising rates sharply in 2022, the value of Treasury bonds declined, resulting in SVB having unrealised losses of $17 billion on its bond portfolio at the end of the year.
When the pandemic ended, many of SVB’s clients began investing their cash in new startups or acquiring new businesses – resulting in deposits falling by $30 billion in nine months.
On 8 March, SVB sold a large part of its bond portfolio to cover the decline in deposits for a $1.7 billion loss, sparking fear among depositors and investors alike.
The liquidation of crypto-focused Silvergate Bank also undermined confidence in banks, compounding the fear of SVB’s bond sale.
This resulted in a run on the bank, with depositors attempting to withdraw $42 billion in one day on 9 March. Regulators took control of the bank the following day, with SVB running out of cash.
Despite regulators insuring all deposits, hoping to back-stop the bank run, panic spread throughout regional US banks, with Signature Bank failing on 12 March.
What happens next
Banks in Europe are now under pressure following UBS’s acquisition of Credit Suisse. The European Central Bank has said it is ready to step in with liquidity if needed.
Kokkie Kooyman, a finance sector expert and portfolio manager at Denker Capital, said on The Money Show there are rising “fingers of instability” where hidden stresses in the system are suddenly becoming more visible.
However, politicians and regulators are correct in saying that the banking system is sound in Europe and the US.
It is just a “few banks with bad business models” coming under stress and have been caught out by the rapid rise in interest rates.
The widespread decline in banks’ share prices is due to investors not taking any chances and just selling all banks, as no one knows which bank will come under pressure next.
“Once all the culprits are out, it will all bounce back,” said Kooyman.
South African banks holding up well
“We’ve got a very good banking system and bank management”, with a central bank that is extremely competent in regulating banks and ensuring stability, according to Kooyman.
South African banks are used to operating in a high-interest rate environment and are good capital allocators.
Local banks could not afford to do “stupid lending or activities” as they never experienced quantitative easing or 0% interest rates.
In South Africa, “money always had a price”, so you never had the excesses you had in America and Europe.
The effects of quantitative easing and 0% interest rates are “coming home to roost”, as many American and European banks made “silly decisions when money didn’t cost anything”.