Svb and Credit Suisse: what have we learned? Ten questions and ten answers

Usually two clues make a proof. In this case we may be looking at something even more glaring. For there is not only Svb and Credit Suisse. There is also Signature Bank for example, not to mention the Silvergate meltdown, as well as an attitude, that of the European stock exchanges, seemingly panic selling (here is our top and flop of the week in Piazza Affari).

How then can one not fear that the world banking system is not at risk, nearly 15 years after the 2008 meltdown? The parallels come almost naturally. Liquidity and solvency crises. Scarcity of corporate credit and controls. Lurching markets. Recession. And central bank monetary policy that is not 100 percent agreeable.

First question: is the world banking system at risk?

This is not quite the case. Meanwhile, there are no direct links to Lehman Brothers. And then no: the banking system is not a risk, at least for the time being. Of course, there is no denying that the timing is almost perfect: in less than seven days two banks literally collapsed (you can read our editorial about it here). Silicon Valley Bank first (which as mentioned was followed by Signature Bank). Credit Suisse then. Eighteen months ago Svb was worth $44 billion and was among the fastest-growing banks of the year in Forbes magazine's ranking: in just a few days it turned into the worst banking meltdown ever in the United States, after Washington Mutual, dating right back to 2008.

The Swiss institution, on the other hand, among the oldest in existence -year of foundation 1856-, is paying for a series of investments that to call wrong is an understatement (we explain it well here). Investments that go back several years, but which are manifesting themselves overbearingly right now, for some due to that "contagion" effect that the markets are still paying for today (this week Piazza Affari has lost more than 6 percent, this means more than a percentage point of decline with each session), in a climate of high tension and distrust of banks.

Yet the markets have experienced sharp declines. How come?

The declines caused by Svb were almost completely absorbed in the following session. The 5 percent decline recorded by Piazza Affari between Wednesday and Friday is certainly an important red. But it fades in the face of the very close to 40 percent gains that the Milanese index has recorded over the past five months. For many analysts, the stock markets have grown beyond all expectations, especially in 2023.

"Surely this is a period when caution cannot but prevail," explains Federico Rajola, director of Cetif, research center on organizational and digital strategic innovation in banking and insurance of theUniversità Cattolica-. So these declines are physiological despite the fact that the authorities are trying to ensure the fact that it is all under their control, to avoid the worst-case scenario that is the rush to the counters to withdraw liquidity." Much will depend on how the Credit Suisse issue, on which the Swiss government is already working with bank managers, is handled.

So what is behind the collapse of Svb and Credit Suisse?

These are episodes linked by a single element: inadequate management of the balance sheet and of the bank in general. As far as Svb is concerned, the mix of factors consists of the accelerated and sudden rise in rates and a crisis, that of the tech sector, which particularly affected startups, an industry that Silicon Valley Bank has historically targeted. "Svb was founded in 1983 and has gone through several crises, so the mismanagement certainly doesn't start from afar"-explains attorney Paolo Bonolis, partner and head of Cms' banking and finance law department. However, its industry is niche. And therefore not systemic. Svb had specialized in an initially thriving market segment, but one that over time has undergone changes, some quite rapid, to which the bank has been unable to adapt."

The rest is common knowledge: "The California institution used almost all of its liquidity in specific bond investments, which came in at low rates, but whose value fell dramatically with the upward intervention of central banks. In addition, the startup market has slowed sharply, resulting in an almost nervous withdrawal of deposits by investors."

Adds Rajola: "The Swiss institute has been the protagonist in recent times of a series of reckless operations, linked first and foremost to a lack of transparency. Greenshill and Archegos are just the tip of the iceberg." Poor management then. Major losses due to bad investments. And, as also happened with Svb, flight from deposits, which had to be taken care of directly by the Swiss government.

But weren't rising rates supposed to be a boon for banks?

They are. But the long-term context must be observed. Because when the rise is particularly rapid-the Fed has raised rates by as much as 450 points in less than a year, after nearly a decade of easy money and near-zero rates, all established by central banks as a restorative move to the 2008 crisis-that's when one of the effects has been an almost frantic search for yields.

Liquidity so high that we no longer even knew where to go to invest. But then the rise in inflation took over, amid the post covid recovery and the Russia-Ukraine conflict. And after several months in which central banks continued to characterize it as a temporary phenomenon, came the turn on monetary policy as well: high rates then, and peremptory raising of the cost of debt. In short, ongoing financial instability has taken a back seat in favor of monetary stability.

Could it be that there were no signs that predicted this crisis?

In fact, the system's vulnerabilities to sudden and rapid rate hikes were and are well known. But these vulnerabilities were allowed to "bubble up" by both the banks and their regulators. "There has been a lack of liquidity control, that is -continues lawyer Bonolis-. Decisive in this regard was the intervention of former U.S. President Donald Trump, who in 2018 lowered the thresholds of attention to medium and small banks. Since that time, supervision has no longer been necessary."

So what is missing is stricter regulation?

The laws were there. They had been introduced after the 2008 crisis as the Dodd Frank Act. It imposed controls on all banks but, as mentioned, in 2018 Donald Trump decided to reserve them only for large institutions to ease the financial sector, thus softening regulation and supervision. Lawyer Bonolis continues, "In Europe probably such a thing would never have happened. Stress tests apply to all banks, even the size of Svb, and they mainly aim to monitor liquidity. Reasonably overseas they must have realized that tightening the mesh a bit on supervision, in the current context, would be appropriate."

Not only that. Professor Rajola adds, "Let's not forget that Svb was holding mostly U.S. government bonds, among the safest bonds out there. The problem is that no one realized in time that those bonds, as rates rose, had lost almost 100 billion in value. And this is where regulation has a lot to do with it."

So, with the post-2008 law maybe Svb would not have collapsed. But then it is true that we are back to 15 years ago.

"It has been 15 years since then. Inevitably, banks are more solid than in the past," the director of Cetif continues. "When Lehman Brothers failed, there was little coordination by the regulators. Probably the case was underestimated and contagion across multiple sectors at that point became inevitable. This time not only was there no contagion, but the authorities reacted well."

Rajola uses what happened with the pandemic as an example. "If you remember correctly, the first few months were quite chaotic. Governments and the scientific community were unable to manage the situation, underestimating some aspects of the contagion. And so all that was left was lockdown. With the arrival of the vaccine, things have improved. The responsiveness of the authorities has improved, as has the management of the masks. In the same way we can interpret what happened then and what is happening now."

Adds attorney Bonolis, "Not only did the system react well, as opposed to 2008. But the reaction was immediate. Hsbc bought Svb in the UK, so even the bank in the Uk became solvent and solvent again. Another example might be Chernobyl. Only in contrast to the Russian government, which tried hard not to let the news get out, the U.S. authorities intervened promptly."

The Swiss central bank bailed out Credit Suisse. So did the Fed and the Treasury. Was it really the right choice?

One would be inclined to give a double answer. Yes, because as mentioned, no bank failed. More importantly, a domino effect was avoided. Or worse, a widespread contagion on the U.S. banking system. On the other someone says: no. It should not have been this way because this creates a moral hazard: banks, from now on, will be "encouraged" to be less responsible. Responds lawyer Bonolis: "More than a moral issue it should be understood that these measures, and also the timing, will not be replicable for every institution. Not a few people believe that the coverage of all deposits by the Federal deposit insurance corporation (Fdic) was excessive. But such an intervention will certainly not be sustainable for systemic banks." 

There is another question that perhaps lacks an answer. And that is: why Svb yes and Silvergate no?

It is known that cryptocurrencies are not exactly the central banks' cup of tea. On the contrary. On more than one occasion Fed and ECB have reiterated how unsafe it is to invest in these assets. It almost comes easy, then, to think that there was much less interest in saving a bank that specializes precisely in crypto, which, in contrast to Svb and Signature, has closed its doors just in these weeks: "Cryptocurrencies are not systemic factors -this is Paolo Bonolis's comment-. On the contrary, it is a system that is self-regulating without a regulator, simply because it does not exist. And in fact the various crises, Silvergate but also Ftx, have not triggered the contagion effect. In fact, in some ways they cleaned up the market of things that were wrong. With the entry into force of Mica surely banks will also enter this market in a more convinced way."

Is there a risk of something like this happening in Europe as well?

No. The EU system requires all banks to have strong liquidity, which is a guarantee of strength and soundness. This is stipulated in the regulation of banking supervision established by the Basel Accords . The guidelines on bank capital requirements, drawn up by the Basel Committee and consisting of the G10 regulators plus Luxembourg, aim to pursue monetary and financial stability. Since 2013, the latest changes have been made specifically as a result of the 2008 financial crisis. These criteria are applied to all banks, large and small, while in the U.S. the application is partial.

Concludes Rajola: "Precisely in the face of these enormous guarantees on European, and even Italian, banks, whose liquidity is even well above the required average, one wonders why the growth of start-ups is not present in their business objectives. If we look at the U.S., their areas of innovation are the best in the world, but also the most aggressive. It is their cultural background; it is not for nothing that the most effective vaccines are the American ones, certainly not the Chinese or British ones. Those who innovate inevitably face greater risks. Our stability might allow us to dare a little more than we should. But evidently we are still far from being willing to do so."