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What's Behind the Latest Banking Crisis?

Plus500 | Tuesday 21 March 2023

Financial collapse seems to be spreading in the United States at the moment. In the span of just over a week and a half, bank troubles seemed to spread like a contagion across the American financial markets; four banks have already called it quits, and a fifth seems to be teetering on the brink. Let’s take a look at how this all started and what the main developments have been:

An Image of a Building with a Bank Sign Engraved On It

Silvergate: The First Collapse

The Southern California-based institution Silvergate Capital Corp. may have been the first domino in the chain that set the subsequent actions in motion. The issues seemed to first begin when investor Sam Bankman-Fried’s house of cards collapsed and FTX, a crypto exchange of which he was the CEO, as well as Alameda Research, its sister company went under; given Silvergate’s exposure to risk-prone Cryptocurrency markets, it may have been just a matter of time before the latter was affected.

The United States’ Justice Department’s investigation and increased regulatory scrutiny may have spooked many of those with holdings in Silvergate, and the financial institution saw fit to offload assets for less than their true market value in order to cover losses stemming from client withdrawals. Just under two weeks ago, on March 8th, the announcement came that Silvergate would be liquidating business operations and cease to function as a bank. 

Silicon Valley Bank

On the same day as Silvergate’s gloomy news reveal, farther north in California,Silicon Valley Bank hit stormy waters as well. The bank, owned by SVB Financial Group, announced to the public that its investment portfolio had seen very significant losses, and the firm’s executive suite pushed to sell more than $2 billion worth of shares. 

However, the process hit significant roadblocks, and on March 10th, Silicon Valley Bank went into Federal Deposit Insurance Corporation receivership. The country’s regulatory bodies originally sought to break the bank up completely, but on Monday, March 20th, it was revealed that the purchase of the bank had aroused interest among other institutions, and it seems that First Citizens BancShares, Inc., a firm well experienced in taking on cases such as these, is still looking to buy SVB out.

Skittishness Spreads

Unfortunately, the jitters experienced by investors concerned by financial institutions’ exposure to Cryptocurrencies did not cease to reach new corners of the market. Quickly following on the heels of Silvergate’s and SVB’s deep troubles, last Sunday, March 12th, Big Apple-based Signature Bank lost a fifth of its total deposits to a steady series of client withdrawals. 

While by many accounts, Signature had less exposure to the Crypto markets that had already brought down many, the American regulatory bodies were nevertheless swift in pushing the bank into receivership. All customers have been given full access to their deposits, but with the purchase of Signature’s assets and many of its loans by NY Bancorp’s (NYCB) Flagstar Bank for the tidy sum of $38 billion, announced Sunday, the former’s locations will soon be flying the Flagstar banner. Perhaps in response, NY Bancorp shares rose by nearly 32% over the course of Monday’s trading session. (Source:Bloomberg)

Venerable Firms Enter the Fray

With fears and concerns surrounding financial viability spreading, it may have come as no surprise that two of the biggest names in global markets have become involved. Last year, a series of financial scandals as well as a massive withdrawal of customer deposits set the stage for the troubles of Credit Suisse (CSGN.VX).

Faced with the options of nationalisation in Switzerland or acquisition, executives at the more than a century and a half old institution opted for the latter, and UBS Group AG (UBSG.VX) will take over Credit Suisse for more than $3 billion. As of the time of writing, Credit Suisse stock has fallen by 55% so far this week, while UBS Group AG is up more than 5%.

Back in California, First Republic Bank, the clientele of which is characterised by high net worth and involvement in the tech industry, has seen estimated deposit outflows of nearly $90 billion. Despite eleven lenders stepping in with $30 billion in deposit infusions in order to stem the haemorrhage last week, investors seem to remain unconvinced regarding First Republic’s viability. According to some reports, JPMorgan (JPM) is looking to enter the arena and convert the aforementioned $30 billion into a capital infusion in the effort to stave off yet another financial institution collapse. The firm’s stock rose by 1% on Monday, but more shifts could be on the way.

The global banking industry has entered quite choppy waters so far this March, and it remains to be seen whether further failures can be evaded. Investors and traders alike will have to keep their eyes peeled in order to see how this all plays out.

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