The fall of Silicon Valley Bank (SVB) on March 10, 2023 sent waves around the financial world; since then we’ve been presented, almost daily, with the news of more banks struggling and a few more collapsing.
The fall of SVB marks the biggest bank failure since the 2008 market crash, as well as the start of multiple other failures (Credit Suisse and Signature Bank) throughout the past weeks. Can we predict what bank is next?
What is causing them to fail?
Of the money they receive through deposits, banks traditionally keep about 10% liquid and they invest the rest. Following this formula, SVB invested most of the significant capital deposited by big tech companies into long-term treasury bonds. As central bank interest rates rose in the United States and clients of SVB demanded higher interest rates, the bank was required to sell some of their bonds at a loss.
When news of SVB losing money hit social media, tech companies who had deposited money in the bank quickly began withdrawing it to minimize their own losses. SVB did not have the liquid cash that the companies were demanding, so it began to fail.
The fall of Signature Bank, which was the 19th largest bank according to S&P Global as of December 2022, displayed a similar domino effect to SVB.
Fear spread among Signature Bank clients that the large amount of the institution’s uninsured deposits also put them at risk for disaster. Shortly after the failure of SVB, New York’s Department of Financial Services announced they were taking possession of Signature Bank – the third largest bank failure in history.
The failure of Credit Suisse, the former second largest bank in Switzerland, followed a different narrative than the other two banks mentioned. Reaching back to 2019, Credit Suisse has faced several scandals including accusations of a wealth management executive spying. The failure of SVB and Signature Bank were simply the tipping point for Credit Suisse’s collapse after their scandalous background. Eventually UBS, the largest bank in Switzerland, bought Credit Suisse for roughly 3.3 billion dollars.
At the time of writing First Republic Bank, which was formed in 1985 and is headquartered in San Francisco, was in danger of collapsing. In the first quarter of 2023 alone, deposits held by the bank fell by 72 billion dollars – a decline of 40%. This year their stock price has decreased by 90% and has made it public that it wishes to cut 25% of its workforce in the upcoming two months. It has recently been bought by J.P. Morgan for 10.3 billion dollars and they are expected to fully cover the 13 billion dollars of debt.
How do bank failures affect you?
Bank failures won’t directly affect you or me directly on a day-to-day scale. But these bank failures could lead to certain aspects that could affect our life such as a possible recession or making loans from banks more expensive. Bank failures won’t affect you most likely on a personal scale but it does affect the economy on a global scale by questioning banks’ liquidity and will make banks a less reliable place to deposit your money.