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New cracks in the global financial systems are showing up across North America and Europe. Since January 2023, several banks have shown extreme financial difficulties starting with Credit Suisse, which was just acquired on March 18th by the other Swiss rival UBS for about US$ 3.6 billion. Credit Suisse had previously refused financial aid from the Saudi royal family, which owns 39% of Credit Suisse through their national Sovereign Wealth Fund PIF. Also, and more concernedly, Silicon Valley Bank (SVB) and Signature Bank have shut down operations in 2023 and have been rescued by the US regulators.  

When does a bank fail?

When a bank can’t manage its obligations, a federal or state agency will shut it down. The Federal Deposit Insurance Corporation, or FDIC, will become the owner of the failed bank. The FDIC will make sure that depositors get their insured deposits and have access to their funds.  Silicon Valley Bank invested a large portion of its funds in Treasury and mortgage bonds, and the bank’s portfolio lost billions of dollars when interest rates rose. As a reminder, the interest rate was raised 7 times in 2022. Once liquidity concerns became apparent at the beginning of March, too many people tried to withdraw their money at the same time, and the bank became insolvent — its liabilities exceeded its assets. As a result, the California Department of Financial Protection and Innovation ordered the closure of the bank. Like SVB, Signature Bank experienced a liquidity crunch and was over-exposed to the bond market. Many depositors took out money from their bank accounts as they were spooked by the previous failure of SVB. Therefore, a bank run occurred, and the regulator took over the bank. 

Never waste a good crisis

The memory of the 2008 financial crisis is well alive in US policy maker’s minds.  This explains the swift reaction of the US regulators to the March collapse of the SVB and two other lenders. This rapid intervention calmed to markets, but concerns remain over the stability of the global financial system. The Fed intervention is commendable as a bank failure would have sent panic across different markets. SVB failure would have also undermined the millions of tech entrepreneurs that rely on this type of bank to fund their operations. 

Is the financial system at risk?

Recent bank failures suggest there was utter negligence in the banks that failed. There is also strong evidence that top executives unloaded millions of dollars of shares in the weeks before the collapse. This is permitted as some banks are not required to file their trades with the SEC.  

What was the role of social media?

Silicon Valley Bank was the first social media bank run in the sense that many concerned shareholders started tweeting alarming messages about the future of the global economy if SVB failed. In doing so they were essentially causing panic and forcing the regulators to intervene. In this environment, where large influencers can shift the market, we should be prepared to deal with irrational crises generated by insiders with vested interest. While this is all concerning, I think we are far from a risk of global contagion. And while Elon Musk tweets that there are resemblances of the 1929 US Great Recession, it is important to remember that there have been 562 bank failures since 2000, as opposed to the over 4000 banks that collapsed in 1933 following the Great Recession.