{"id":186920,"date":"2023-03-17T11:15:00","date_gmt":"2023-03-17T15:15:00","guid":{"rendered":"https:\/\/ibkrcampus.com\/?p=186920"},"modified":"2023-03-17T11:05:12","modified_gmt":"2023-03-17T15:05:12","slug":"why-credit-suisse-silicon-valley-bank-dont-point-to-a-financial-crisis","status":"publish","type":"post","link":"https:\/\/www.interactivebrokers.com\/campus\/traders-insight\/securities\/macro\/why-credit-suisse-silicon-valley-bank-dont-point-to-a-financial-crisis\/","title":{"rendered":"Why Credit Suisse, Silicon Valley Bank Don’t Point to a Financial Crisis"},"content":{"rendered":"\n

Key takeaways<\/h2>\n\n\n\n

Byproduct of tightening<\/h3>\n\n\n\n

Tightening cycles in 1984 and 1990 led to banking issues but didn\u2019t result in severe recessions or threaten the global financial system.<\/p>\n\n\n\n

Not a solvency issue<\/h3>\n\n\n\n

Bank asset quality, in aggregate, is sound.1<\/a><\/sup>Today\u2019s challenges are funding and liquidity issues.<\/p>\n\n\n\n

There may be more<\/h3>\n\n\n\n

That\u2019s how tightening cycles tend to play out. Policymakers are ready to respond and financial system should withstand challenges.<\/p>\n\n\n\n

The ghosts of 2008 Global Financial Crisis are still haunting us. Fears are mounting that high-profile bank failures, including <\/a>Silicon Valley Bank<\/a> (SVB) and Signature Bank, will expose the interconnectivity of the global financial system, resulting in other dominos falling. In 2008, it became a game of whack-a-mole for policymakers that only concluded with massive support for the entire system. By that time, however, the broad US stock market had already fallen close to 60%.2<\/a><\/sup> It\u2019s no surprise then that the three recent bank failures and <\/a>the crisis of confidence in Credit Suisse<\/a> have investors concerned. Credit Suisse is, after all, larger than Lehman Brothers. Are we right to be conjuring the images of 2008?<\/p>\n\n\n\n

All financial crises aren\u2019t the same<\/h2>\n\n\n\n

Financial crises are a part of tightening cycles. However, not all crises resembled 2008. For example, the tightening cycle of 1983-1984 culminated in a bank run on Continental Illinois, which had been the seventh largest bank in the US.3<\/a><\/sup> Similarly, the savings and loan crisis of 1990 followed a period of significant policy tightening. Over 1,000 financial institutions failed as ever-higher borrowing costs exceeded the income generated on loans they had made.4<\/a><\/sup> Nonetheless, the events of 1984 and 1990, while challenging, did not result in severe recessions or threaten to bring down the global financial system. Bank failures have been common over the years \u2014 less so in a zero-rate world \u2014 but have not always led to \u201cthe big one.\u201d<\/p>\n\n\n\n

Today\u2019s issue isn\u2019t insolvency<\/strong><\/h2>\n\n\n\n

A fundamental feature of the 2008 Global Financial Crisis was that many of the largest and most interconnected banks in the US became insolvent. This was a direct result of their leveraged exposure to the US housing market. Assets like mortgage-backed securities, for example, were worth far less than stated and the leverage was significantly greater than had been claimed. The banks failed because of bad loans and poor credit underwriting. Remember NINJA loans, \u201cno income, no job, no assets?\u201d That\u2019s not the case today. <\/p>\n\n\n\n

Bank asset quality is generally sound<\/h2>\n\n\n\n

Bank asset quality, in aggregate, is sound.5<\/a><\/sup> Silicon Valley Bank (SVB), for example, didn\u2019t fail because it was exposed to worthless assets. Rather, most of the assets on its balance sheet were US Treasury bonds, albeit with lower interest rates than offered in the primary market. SVB failed because the tech start-ups, who were their primary customers, began pulling deposits as they were losing access to venture capital funding. SVB couldn\u2019t overcome having to sell the Treasury bonds at significant losses to try to match the deposit withdrawals. Its failure led to a disquieting weekend for the smaller and\/or regional banks in the US, but the challenges were largely alleviated once the <\/a><\/a>Federal Reserve<\/a> emerged as a lender of last resort.<\/p>\n\n\n\n

As is often the case, policymakers put out one fire only for another one to start \u2014 the deteriorating confidence in Credit Suisse, which has long been a troubled bank. It posted poor quarterly results and was informed by their largest shareholder that they would not be putting more money into the bank. Credit Suisse, unlike SVB, is a large global integrated financial institution. A crisis in confidence could ripple throughout the global financial system. Credit Suisse, unlike Bear Stearns and Lehman Brothers in 2008, however, has a sound asset base. They\u2019re not sitting on a pile of worthless assets. The challenge, instead, is a funding and liquidity issue. The Swiss National Bank announced they\u2019ll provide funding support to Credit Suisse if necessary.<\/p>\n\n\n\n

More things may break<\/h2>\n\n\n\n

Lest I sound too Pollyanna, there are still challenges and the potential for something else to break \u2014 whether it\u2019s a hedge fund, shadow bank, or something else entirely remains to be seen. It\u2019s likely, though, that another entity will emerge with significant unrealized losses buried in its portfolios. That\u2019s how the end of tightening cycles tends to play out. If the past days, however, are any indication, then policymakers stand ready to respond to challenges as they unfold. Further, the global financial system is in much better shape to withstand such challenges than it was in 2008.<\/p>\n\n\n\n

Financial shocks always test nerves, and this time is no different. They don\u2019t always have to be as severe as 2008, our recency bias notwithstanding. For what it\u2019s worth, 1984 and 1990 proved to be good long-term buying opportunities for many investors.6<\/a><\/sup><\/p>\n\n\n\n

Check out our latest podcast<\/h2>\n\n\n\n

The news about Silicon Valley Bank has been fast and furious. That\u2019s why I was glad for the opportunity to talk with Senior Portfolio Manager Justin Livengood, whose research specialty includes the financial sector. Justin joined the Greater Possibilities Podcast<\/a> earlier this week to talk about what drove the bank\u2019s failure, why today is different than 2008, and what this may mean for Federal Reserve policy and the economy. You can listen to our conversation here.<\/p>\n\n\n\n

Footnotes<\/strong><\/p>\n\n\n\n