The collapse of five banks over 12 days has caused shockwaves throughout global financial markets.
These five banks are spread across the United States and Europe. There is little to link them directly, except the general trends of central banks raising interest rates to combat inflation and COVID-19 pandemic-era easy money policies. However, their near simultaneous troubles have led to regulators across the globe hurriedly taking measures to prevent further crisis.
Though not all of these five banks have failed, and a larger domino effect is yet to be observed; the pace of these troubles made markets jittery about a potentially unseen spillover, a repeat of the 2008 financial crisis.
The problems started with crypto-industry friendly California based Silvergate Bank, whose parent Silvergate Capital on March 8 announced that it was winding up its banking unit. The most recent victim of this series was Swiss banking giant Credit Suisse, who was acquired by its larger peer UBS on March 20.
Further, three of these US-based banks were operating in niche sectors like tech and crypto companies, whose sectorial slowdowns have had a direct impact on these banks.
Here's how the timeline panned out.
March 8: Silvergate Bank winds down
Silvergate Bank did not explicitly fail.
Rather, it was wound down before it could implode.
It was a crypto-friendly bank, providing banking services to blockchain and cryptocurrency research and trading firms. Amongst its marquee customers was FTX, whose collapse four months ago was a turning point in the crypto space. FTX founder and CEO Sam Bankman-Fried was arrested on charges of fraud and is currently out on bail.
Another one was Binance, the world's largest cryptocurrency exchange by volume.
In January during its earnings, Silvergate Bank announced that it had lost nearly $1 billion after its customers rushed to withdraw $8.1 billion. On March 1, Silvergate Bank announced that it had to review its financials and that it would be unable to file key financial and regulatory documents.
On March 8, Silvergate Capital announced, "In light of recent industry and regulatory developments, Silvergate believes that an orderly wind down of Bank operations and a voluntary liquidation of the Bank is the best path forward. The Bank’s wind down and liquidation plan includes full repayment of all deposits."
It also wound down the Silvergate Exchange Network, that let several of its clients move money among themselves.
March 10: Silicon Valley Bank fails
Silicon Valley Bank - a California based financial institution linked to its startup and venture capital space - was taken over by Californian financial regulators on March 10 after it faced a run on its funds, racing to withdraw nearly $42 billion.
What is a bank run?
When the depositors of a bank rush to withdraw their funds almost all at once, putting withdrawal pressure on banks that they usually cannot meet. This leads them to fail, or to ask the financial system for support.
It was the second largest bank failure by assets, with assets of $206 billion.
California's Department of Financial Protection and Innovation cited three reasons for the move: the bank's insolvency, its unsafe business practices and its inadequate liquidity positions where it could not pay its dues. The bank run had left it with a negative cash balance of $958 million.
Problems with the bank started after tech companies needed to rely on more cash parked with the bank due to higher borrowing costs and a worsening economic outlook. To meet this, the bank had to sell a tranche of its government securities at a loss worth $1.8 billion in a fire sale. Raising interest rates also meant that these assets were less valuable than when they purchased them, marking a loss of $15 billion on this markdown alone.
Its stock price crashed after the bank considered a stock sale in a bid to raise capital, prompting a run on the bank.
Moreover, in the first sign of troubles abroad, HSBC purchased the British arm of the bank for just one pound in a transaction facilitated by the British government and the Bank of England.
March 12: Signature Bank taken over by regulators
In a late-night move on March 12, New York-based Signature Bank was taken over by state regulators. As a crypto-friendly bank, they too had an account at FTX.
It was the third largest bank failure, right behind Silicon Valley Bank.
The New York State Department of Financial Services took over the Signature Bank and appointed the Federal Deposit Insurance Corporation (FDIC) as receiver, like California's regulator did with Silicon Valley Bank.
The FDIC is the federal deposit insurer, that guarantees bank deposits up to $250,000. Further, the assets of the bank have been made marketable by referring them to a new holding entity and full-service bank - Signature Bridge Bank N.A. - to make it more marketable.
The next day, on March 13, US President Joe Biden addressed the situation and said that shareholders would not be rescued but all deposits across all banks would be kept safe.
March 16: Big banks race to rescue First Republic Bank
This bank has not failed but remains immensely fragile after an exodus of depositors.
Eleven US banks, including big guns like JPMorgan Chase, Citibank, Wells Fargo and Bank of America, committed to depositing $30 billion with smaller First Republic Bank to quell panic after the collapse of Silicon Valley Bank and Signature Bank The four aforementioned big banks committed $5 billion in uninsured deposits while Morgan Stanley and Goldman Sachs committed $2.5 billion and five other banks committed $1 billion. This can be read here.
This move was taken by the banks after depositors with First Republic Bank withdrew their funds in droves in a panic move and deposited them with these big names. The Wall Street Journal reported that it was after a conversation between Janet Yellen, the Treasury Secretary and Jamie Dimon, the CEO of JPMorgan Chase that kickstarted this move.
Shares of First Republic Bank collapsed 60% last week, with its market capitalization falling from $21 billion to less than $5 billion. Its bonds were already junk - only for rating agencies like S&P to further downgrade them. Commentary from the ratings agency indicates that the $30 billion deposit might not be enough to save the bank.
The bank closed at $15.97, up 29.47% on March 21.
March 20: Credit Suisse is acquired by UBS
On March 20, Swiss multinational banking group UBS announced that it was acquiring its smaller peer Credit Suisse in an all-share transaction worth $3.2 billion, or three billion Swiss francs.
The transaction followed the frantic efforts by the Swiss National Bank, the Swiss Federal Ministry of Finance and FINMA, the Swiss market regulator, to stabalise Credit Suisse after fundraising efforts did not materialise. The deal was pushed through based on emergency powers which ensured that it would not require any shareholder approval.
The deal is expected to go through in the second quarter of this year.
In another move than opened a can of worms, risky bondholders (additional tier 1) saw their investments marked down to zero while shareholders stood to benefit from the move. Legal action is expected and is being planned by bondholders. Usually, in claims on defunct company, bondholders get precedence over shareholders.
To be clear, the stress faced by the banks in the US are not similar to Credit Suisse. The Swiss bank had its own set of troubles ranging from charges of knowing about corruption, money laundering, trafficking to concealing funding of projects abroad with kickbacks to its employees.
But the timings of its latest troubles coincided with banking troubles in the US to send jitters through the European banking system.
Do you always want to share the authentic news with your friends?