Risk Management Insights from SVB's Collapse and Credit Suisse's Struggle

The recent failure of Silicon Valley Bank (SVB) and the turmoil faced by Credit Suisse, now acquired by UBS, have sent tremors throughout global financial markets. These events have raised concerns about risk management practices and the resilience of the entire banking sector. This article will explore the key insights from these two incidents and assess their potential implications for financial markets, aiming to identify key takeaways for the future.

This will be achieved by delving into the following topics:

• A concise history of SVB and its downfall

• An overview of Credit Suisse's challenges

• Identifying the commonalities between the two banks

• Assessing the potential impact on financial markets

A Concise History of SVB and its Downfall

SVB, formerly the 16th largest bank in the US with over $209 billion in assets, collapsed suddenly in early 2023. This event marked the largest bank failure since the 2008 financial crisis, leaving many puzzled about how SVB went from being listed in the February issue of Forbes Magazine’s ‘America’s best banks’ to bankruptcy in March.

Established in 1983, SVB built a solid reputation as the preferred institution for venture capital and tech startups, with nearly 50% of all US startups holding deposits with the bank. In 2020, the bank experienced significant growth due to low-interest rates and a thriving tech sector during the pandemic. By the end of 2021, SVB's deposits had increased from $61 billion in 2019 to $189 billion. To capitalise on this growth, the bank invested $80 billion of its deposits in long-term bonds and other securities.

However, rising inflation in late 2021 led the US Federal Reserve to sharply increase interest rates in 2022. This shift caused SVB's long-term Government-issued bond values to plummet, resulting in billions of dollars in unrealised losses. Meanwhile, tech firms, struggling to secure financing in this climate, began withdrawing their deposits from SVB. To cover these transactions and boost liquidity, SVB sold its entire liquid bond portfolio worth over $21 billion, incurring a $1.8 billion loss. The poorly managed announcement by SVB's management team triggered a bank run, leading to the bank's collapse.

An Overview of Credit Suisse's Challenges: A Crisis of Confidence

As the second-largest lender in Switzerland and a 167-year-old institution, Credit Suisse's struggles have had far-reaching consequences. Categorised by the international Financial Stability Board as being a “global systematically important bank,” its challenges can be traced back to a series of missteps and scandals over the past decade.

Years of chronic issues, an announcement of a “completely unacceptable” full-year net loss of 7.3bn Swiss France by its CEO, and a statement by the Saudi National Bank that ruled out providing fresh funding to the bank due to regulatory caps saw Credit Suisse’s shares fall 30% to a record low of approximately 1.56 Swiss francs a share on Wednesday 15 March. 12 hours later, the bank announced it would undergo a massive strategic overhaul and exercise its option to borrow up to 50bn Swiss francs from the Swiss National Bank. By the following weekend, the bank’s Swiss rival UBS announced plans to acquire Credit Suisse in a government-backed deal.

Identifying the Commonalities between SVB and Credit Suisse: A Perfect Storm

The collapse of SVB and the turbulence of Credit Suisse have created a perfect storm, rattling global financial markets and raising concerns about the stability of the banking sector. Both events underscore the significance of robust risk management practices and stringent regulatory oversight. The combined impact of these events has led to an atmosphere of heightened uncertainty, with financial markets reacting nervously to each new development. This turbulence serves as a wake-up call for banks, regulators, and investors, emphasising the need for vigilance and proactive risk management.

Assessing the Potential Impact on Financial Markets

Financial institutions must prioritise risk management and compliance, integrating these aspects into their organisational culture. This includes regularly reviewing risk exposures, strengthening internal controls, and investing in robust risk management systems. Regulators, of course, also play a vital role in maintaining the stability of the financial system. They must be proactive in identifying potential risks and taking swift action to address them. In the case of Credit Suisse, the Swiss authorities intervened with a significant loan to maintain the bank's liquidity, highlighting the importance of strong regulatory oversight.

Key Takeaways

By learning from these events and implementing more robust risk management practices, banks, regulators, and investors can collaborate to create a more stable and secure financial environment. Ultimately, the lessons learned from these incidents should lead to better preparedness and risk management in the financial sector, reducing the likelihood of similar crises in the future.

Disclaimer: Any information presented is for general education and informational purposes hence, not intended to be and does not constitute investment or trading advice or recommendation. No opinion given in the material constitutes a recommendation by M4Markets that any particular investment, security, transaction or investment strategy is suitable for any specific person.

It does not take into account your personal circumstances or objectives. Any information relating to past performance of an investment does not necessarily guarantee future performance.

Trinota Markets (Global) Limited does not give warranty as to the accuracy and completeness of this information.

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