Banking Failures of 2023
The collapse of Sillicon Valley Bank (SVB) in March 2023 sent shockwaves throughout the financial world.
SVB has been a major player in the US banking system since its inception in 1983, specializing in serving the need of tech companies.
In 2020, when the pandemic triggered a boom in the tech industry, the bank was flooded with cash from venture-backed companies. With the money, SVB invested heavily in longer-term US treasures and government-backed mortgage securities. However, when interest rates began to rise, bond prices fell, and SVB was left holding billions of dollars in losses. To make matters worse, the tech industry experienced a downturn, and new deposits shrank by more than USD 30 billion, leaving SVB in a precarious financial position.
The Leading Present Day Incidents
On March 8th, SVB caused alarm among investors by announcing the necessity of strengthening its balance sheet by raising USD 2 billion in capital. SVB was forced to sell a bond portfolio at a USD 1.8 billion loss. SVB’s CEO, Greg Becker, in a letter to customers acknowledged that customer deposits had been lower than projected in February. As a consequence of these developments, Moody’s, a credit rating agency, downgraded the bank’s bond rating and changed its outlook from stable to negative.
On March 9th, panic from investors prompted a high volume of customer withdrawals, mostly from tech-startups, which caused SVB shares to plummet by 60%. The bank was unable to generate enough cash to meet the needs of depositors and it collapsed. The FDIC took over the bank to protect depositors, but accounts that exceeded the $250,000 protection threshold risked losing portions of their money.
On March 10th, SVB was unable to sustain its operations and began collaborating with financial advisors to identify potential buyers. By midday, the bank was taken over by regulators, SVB put nearly USD 175 billion in customer deposits under the regulator’s control. This event is then named the largest bank crash since the 2008 financial crisis.
There were many factors that led to the bank’s collapse. Those being risky lending, and careless risk management systems. With stronger regulation and oversight on SVB’s low-yield bond portfolio, as well as more conservative lending practices, it may have been possible to avoid or mitigate the risks associated with the bank run.
A key factor however, was simply due to client's loss of faith. When clients start to lose faith in a bank’s ability to keep their money safe, they may begin to withdraw their deposits, cancel their accounts, and look for alternative banking options.
When Panic Strikes
The repercussions of SVB’s financial problems spread throughout the banking industry, prompting investors to sell stocks of other banks, including First Republic, Signature Bank, and Western Alliance.
On March 12th, regulators seized Signature Bank who was impacted by the panic, to prevent the spread of banking contagion. The FDIC later announced that depositors will have access to all of their money, including those that exceeded $250,000.
On March 13th, impact on regional bank’s caused their stocks to plunge. First Republic dropping 65%, and Charles Swab dropping 11%, which soon recovered a day after. On this day, HSBC also announced buying out Silicon Valley Bank’s British subsidiary for $1.21 (£1).
On March 15th - 16th, Credit Suisse shares dropped 24%, and announced it would borrow $54 billion from Switzerland’s central bank under a covered loan and a short-term liquidity facility. First Republic Bank also received $30 billion in deposits from nearly a dozen of the United States’ biggest banks. In total, the Federal Reserve announced that banks had borrowed $11.9 billion from the emergency loan program to shore up the banking system.
Switzerland’s biggest bank, UBS then reported agreeing to purchase Credit Suisse for USD 3.25 billion in an emergency deal, about 60% less than what the bank was worth before the downfall, in efforts to secure financial stability and protect the Swiss economy. Shareholders’ shares dropped from USD 2.02 to just USD 0.82 in a matter of days. Owners who invested in USD 17 billion worth of additional tier-one bonds – a riskier class of bank debt, were at risk of losing everything.
The recent cases, such as those of SVB, Signature, and Credit Suisse, have once again highlighted the risks of banking failures. However, it is important to note that bank failures have been a recurring issue for decades. The most notorious cases in recent history are the 1998 Asian financial crisis and the 2008 global financial crisis.
Biggest Banking Failures in History
Banking failures have been a recurring theme throughout history, with devastating consequences for individuals and the wider economy. Washington Mutual for instance, was a large savings and loan bank based in Seattle, Washington, which had been in operation since 1889. By the early 2000s, the bank had become heavily involved in subprime lending, issuing risky mortgages to borrowers with poor credit histories. In 2008, the housing market collapsed, and many of these borrowers were unable to keep up with their mortgage payments. This led to a wave of foreclosures, which in turn triggered the collapse of Washington Mutual. On September 25, 2008, the FDIC seized the bank and sold it to JPMorgan Chase for USD 1.9 billion.
Indonesia’s 1997-1998 banking crisis and SVB share analogous cases of excessive borrowing by corporations and financial institutions, weak banking regulations, and struggles to maintain the confidence of their depositors and investors, that led to one of each cases downfall.
During mid-1997 the value of the Indonesian rupiah begins to decline due to a combination of factors such as growing trade deficits, weak economic fundamentals, and political instability. The rupiah came under severe downward pressure when the Thai baht experienced devaluation.
In late-1997, the government finally announced a bailout plan for 16 Indonesian banks, triggering concerns of the country's overall financial health. Similar to the case of SVB, panic wreaked havoc when Indonesian’s started selling their stocks, causing share prices to plummet. Depositors also started withdrawing money from troubled banks, which caused the government to impose withdrawal limits and freeze foreign debt payments nationwide. Currencies reached as low as IDR 14,000/USD during the time.
Early-1998, the International Monetary Fund finally released a bailout package worth $40 billion, conditional on the Indonesian government implementing economic reforms. During this time, many banks have historically undergone collapse, leading to further panic and social unrest.
In mid-1998, Indonesian President Suharto and its once authoritarian regime resigns due to widespread protests and riots. Following this event, the IMF announced a second share of funds, as well as closing dozens of insolvent banks that have been impacted. By the end of July 1998, the rupiah stabilizes and the economy begins to recover slowly.
In light of the crisis; by the end of September 1998, a merger between Indonesian Bank Restructuring Agency, along with Bank Mandiri and four other state-owned banks: Bank Bumi Daya, Bank Dagang Negara, Bank Exim, and Bank Pembangunan Indonesia was made. It was a significant step in restructuring and strengthening the banking sector to better withstand future financial shock, and support economic growth. The government played a significant role in the merger, providing financial support and guarantees to the new institution. This was necessary to reassure customers and investors, and to provide stability to the banking sector. The merger was also an effort to eliminate costs of banking liquidation as much as possible.
The merger case was not a simple task, taking into consideration the recovery of a healing economy. Operations made post-merger, forced the bank to lose as many as up to 9,000 employees in over 194 offices. Integration and restructuring of the corporate cultures, and systems of four inadvertently different local banks too, was an obstacle to overcome. During the time, Bank Mandiri had to restructure its mergers’ foreign and local creditors, adding up to USD 2.7 million, and USD 1.5 billion in debts respectively. After a long year of survival, Bank Mandiri was able to revive itself from the impact of the 1997 crisis, as losses were reduced by half in the year 1999. Overall, the experiences of SVB and Indonesia’s bank crisis illustrate the importance of risk management in both traditional and modern-day tech-facing banks. While SVB was trying to maintain liquidity by monitoring borrower performance, Indonesian banks had to deal with the challenges of a weakening currency and external debt.
Limitations of Regulations
These two cases also suggest differences in regulatory efforts made to prevent bank runs. Both Indonesia’s Lembaga Penjamin Simpanan (LPS) and the US Federal Reserve have comprehensive deposit insurance schemes; up to IDR 2 billion and USD 250,000 per account, respectively.
Another significant regulatory change made after the crisis was the implementation of Bank Indonesia’s Liquidity Support (BLBI) scheme, which aimed to provide liquidity support to troubled banks. The BLBI scheme provided loans to banks in need, but also required strict conditions and oversight to ensure that the funds were used appropriately and that the banks would be able to repay the loans.
In addition, the government implemented stricter capital requirements and improved supervision and regulation of banks. This included requiring banks to maintain higher levels of capital and implementing more rigorous reporting and risk management standards.
While regulatory frameworks and government intervention are crucial in promoting financial stability and protecting the interests of bank clients, there are certain aspects of the banking systems that are beyond the control of regulation. For instance in SVB case, change in market sentiment towards startups and the whole tech ecosystem. As such, it is essential for banks to adopt proactive risk management strategies and foster a culture of accountability and transparency to mitigate the impact of unpredictable events and maintain public trust in the banking system.
The collapse of SVB in March 2023 serves as a cautionary tale of the devastating consequences of excessive borrowing, weak regulations, and loss of customer confidence in the banking system. The failure of one bank led to a chain reaction that impacted the whole industry and global panic. While banking failures have been recurring throughout history, it is essential to learn from past mistakes and implement measures that ensure the stability and resilience of the financial system. The 2023, 2008, and 1998 bank crisis showcase the significance of restoring confidence, effective banking regulation and supervision, transparency, and accountability, strong regulatory frameworks, and effective oversight used to prevent or mitigate the risks associated with financial collapse.
OCBC NISP Ventura
March Newsletter 2023