The biggest banking failure since the 2008 Global Financial Crisis shook financial markets in March 2023 after two US banks collapsed and challenges at a third EU bank surfaced. The first was the tech start-up financier, Silicon Valley Bank which went bust on 10 March 2023 after multiple clients tried to access their deposits. This was the second-largest bank failure in US history and the largest since the 2008 Global Financial Crisis.

According to the Wall Street Journal, SVB collapsed after “venture capitalist helped to trigger panic withdrawals by SVB clients” and due to “2018 regulatory rollbacks led by then-President (Donald) Trump.” “The bank’s vulnerability was the result of having a high proportion of uninsured deposits and a large proportion of deposits invested in hold-to-maturity securities,” reported Wall Street Journal.

SVB bought these securities in 2020 with its increased cash deposits. However, when the US Federal Reserve started its tightening cycle, by rising interest rates in March 2022, bond prices started to fall. Causing the value of the bonds held by SVB to trade about $17bn less than its book value, according to the Wall Street Journal.

Two days after the failure of SVB, another small US bank, the Signature Bank also collapsed and was seized by regulators. “State regulators said they intervened after losing faith in the firm’s management, as the bank failed to provide reliable and consistent data as the industry came under pressure,” reported Bloomberg. A few days later the US regulators announced that even uninsured deposits over $250 000 from SVB and Signature Bank would be covered.

Then a few days later, another blow to the banking sector when the auditors of EU-based Credit Suisse said they identified “weaknesses in its financial controls.” According to the Telegraph: “Fears intensified when a major shareholder, the Saudi National Bank, said it  would not buy any more shares in the Swiss lender. Credit Suisse’s shares fell 24% by close on Wednesday (15 March 2023) and major indexes plummeted as fears of a banking crisis spread.”

While the fortunes of one industry – tech start-ups –  was tied to SVB, many US government officials,  including President Joe Biden, is blaming the roll-backs of the Dodd Frank Act in 2018, which caused less stringent controls for banks with less than $250 billion in assets. Janet Yellen, US Treasury Secretary, told the BBC that the US government will not bail out a bank again, but  that they are “focused on depositors and trying to meet their needs.”

Our view

What happened at SVB is not surprising given the increasing interest rate environment. Higher rate cycles have a habit of exposing weaknesses in business models and risk management practices, of which SVB is a good example.

As the US Treasury and US Government have noted, the cost of the SVB and Silvergate collapse will not be borne by the tax payer, but through fines that will be levied against the banking industry over time. This could have an impact on the returns of banking shares over the long run and is something our equity portfolio committee is considering.

While smaller US banks with less liquidity could still cause the market a headache or two, we do not believe that larger higher quality banks are in the same boat, especially due to the stricter regulations they have had to adhere to since 2008.

We also do not believe that South African banks are exposed to contagion risk from falling lenders in the US or Europe at this stage. US and Swiss authorities have placed risk mitigation protocols in place to prevent further contagion, and our banks remain generally well regulated, capitalised and managed. Still we will continue to monitor these developments in the global banking industry with scrutiny.

In March 2023, financial markets were shaken by the biggest banking failure since the 2008 Global Financial Crisis. Two US banks collapsed, including Silicon Valley Bank, which went bust on March 10, 2023, after many clients attempted to withdraw their deposits. This was the second-largest bank failure in US history and the largest since 2008. Additionally, challenges emerged at a third EU bank. This Special Report summarises our view on the events that have unfolded.