The first bell for the US stock market sounded in early March. Silvergate Capital, a holding company that includes Silvergate Bank, announced on March 8 that it was closing the bank due to financial problems. The main reason is the collapse of the FTX crypto exchange, which occurred back in the fall. Silvergate is a company that is one of the main beneficiaries of the development of the crypto industry, it served ordinary investors and crypto startups who kept funds in its bank. The collapse of FTX undermined the stability of the company – a significant part of its customers worked through FTX. The panic in the crypto industry has taken a toll on Silvergate, with clients beginning to withdraw their funds from the bank, increasing pressure on Silvergate's balance sheet and assets.
Additional pressure created a bank business model that was unusual for this type of organization. The company did not accept funds for deposits and did not issue loans, the money of partners and clients was invested in securities, as well as US government bonds, and the main stake was placed on the development of an instant transfer service from fiat (classic money) to crypto assets using the Silvergate Exchange Network (SEN) platform. ), through which hundreds of billions of dollars passed. FTX's problems led to a three-fold reduction in bank deposits: $12 to $3.9 billion by the end of 2022. The cash gap and the need to replenish liquidity amid an outflow of funds forced the bank to sell its assets at a loss, which negatively affected the balance sheet.
The problems had to be announced publicly, after which other major partners of the company, for example, the Coinbase crypto exchange, began to refuse cooperation. Against this background, the shares of the head structure collapsed almost to zero. If at the beginning of 2023, against the backdrop of all the problems of the industry, the company's shares were trading at $17.27, immediately before the announcement of the company's serious problems – at $13.53, then at the peak they fell by almost 90%, to $1.7 per share.
Investors regarded Silvergate as a special case, but less than a week later, the stock market was rocked by the news that the US authorities had decided to close Silicon Valley Bank (SVB) – 16 by assets and the largest bank facing similar problems since the 2008 global financial crisis. of the year. The main reason for the fall is the same – investments in long-term government bonds, which fell sharply against the backdrop of higher rates, as well as an outflow of deposits, which led to an imbalance in the system.
The total amount of deposits at the end of 2022 in SVB was estimated at $175.4 billion, of which approximately $91 billion was invested in long-term government bonds, which had depreciated by $15 billion by the time the bank fell. However, on March 11, SVB faced a record capital outflow from the bank – for $42 billion of deposits were withdrawn from it in a day, which sent the shares at the peak – a drop of 66% per day. Against this background, the exchange stopped trading, and the authorities decided to close the bank, which was considered a base for startups around the world.
The fall of banks did not end there, two days later, on March 12, the American authorities decided to close the Silvergate competitor bank – problems overtook Signature Bank, another financial institution associated with the crypto industry. And again, the reasons for the collapse are similar: the depreciation of the bank's long-term assets, the outflow of capital, and not the most successful business model of a financial institution.
The loss of three banks in a week shocked the US stock market. The belated reaction of the authorities began to give rise to rumors and expert opinions that the US financial system is in deep crisis, and the number of bank closures will only grow. During trading on Monday, the entire banking market in the US and Western Europe faced an unprecedented sell-off, the shares of some mid-level organizations could fall by 80% per day. One of these banks was First Republic Bank, which fell by 78% in a day, analysts called it the next victim of the “bank apocalypse”.
The situation became so serious that the White House had to comment. On Monday, US President Joe Biden came out to reporters and assured markets and citizens that everything was in order with the US financial system. He promised that bank customers would return their funds, and those responsible for the collapse of financial institutions would be punished. Only creditors of banks will remain in the red – the US government will not compensate them for anything. First Republic Bank, which suffered from the outflow of capital, was saved by larger colleagues – JP Morgan Chase, Citibank, Bank of America, Wells Fargo and other banks agreed to place about $ 30 billion in it.
Against the backdrop of American negativity, the beginning of the week was not set for European banks, whose shares also began to rumble. All the largest banks in Europe faced a fall within 13%: Deutsche Bank, UniCredit, HSBC, BNP Paribas, Société Générale, Banco Sabadell, ING, etc. However, the “leader” of the fall was the Swiss bank Credit Suisse, which experienced financial difficulties.
Public discussion of its financial difficulties began in September, the company began to have problems with liquidity and assets, the bank also faced an outflow of customers. In February 2023, the bank reported record losses, despite assurances from management that the situation was under control. A new round of pressure on the banking sector led to a record low capitalization of the bank, shares fell below $1.7 per share, which was the lowest value in all 187 years of the bank's history. The new collapse in prices has raised fears among European investors, who have started talking about systemic problems.
Against this background, the Swiss Central Bank entered the situation, which responded positively to the request of Credit Suisse management for financial assistance. The Swiss regulator assured that it will provide the necessary liquidity to the troubled organization in the amount of $54 billion, as well as additional volumes, if necessary. The regulator is also considering the option of merging Credit Suisse and UBS, but the final decision has not yet been made, and the parties are negotiating.
Experts disagree on the assessments and prospects of the Western banking crisis. For example, JPMorgan analysts are confident that at the moment the market sees only the “tip of the iceberg”, and 2023 will face new bank failures amid an economic recession. Some experts, on the contrary, believe that after such a shock, the authorities will not allow the “contagion to grow” and will take sufficient measures to ensure that banks do not fall again.
The main problem for banks in the current environment is the high key rate in Europe and the United States, it is precisely because of the tightening of monetary policy that many bank assets have depreciated, which affected the quality of assets. After a wave of American bankruptcies, the market immediately lowered expectations for a rate increase in the US economy, as a further rate increase would carry more risks for the financial system than help in the fight against inflation.
Similar rhetoric has already been heard from the head of the European Central Bank (ECB), Christine Lagarde, who this week announced a rate hike of 0.5 percentage points, but stressed that in the future, a single European regulator intends to soften the rhetoric and reduce the step in raising rates, or even take a pause in order to stabilize the situation, but at the same time continue the fight against inflation. Similar steps are now expected from the US Federal Reserve.