Banking woes dominate the headlines

It is probably fair to say that until very recently, many European and Maltese retail investors had never heard about Silicon Valley Bank and Signature Bank. Unfortunately, these institutions collapsed earlier this month, forcing the US government and the Federal Reserve to take over both institutions and protect all depositors.

The demise of Silicon Valley Bank (the second-largest banking failure in the history of the US) depicted a number of major flaws within its business model as well as the regulatory and reporting environment in the US financial system. Essentially, the bank had a concentrated depositor base (and experienced large deposit outflows after the bank reported losses of US$1.8 billion on the sale of a portion of its bond portfolio) coupled with a particularly illiquid balance sheet structure.

Moreover, the values of their large holdings of long-dated US treasuries (government bonds) were not accounted for within their capital structure, as we are accustomed to across Europe, due to an exemption under US regulator rules for ‘small’ banks. As such, when losses were crystallised on sales of these US treasuries, Silicon Valley Bank also ran short of capital.

Although the business models of these US regional banks that ceased to operate are totally different to the well-known and much larger US and eurozone banks, confidence across the global financial system weakened tremendously on the news of their demise.

The Swiss banking giant Credit Suisse had been under scrutiny for several years due to a series of scandals which damaged their brand immensely and led to sharp losses (the bank lost around CHF7 billion in 2022 − its worst performance since 2008). Credit Suisse was clearly the weakest link among global systemically important banks.

The statement by Credit Suisse early last week that its auditors PwC had raised doubts over its internal controls exacerbated these concerns and led to a slump in the bank’s share price. This intensified the following day with the share price dropping by a further 25 per cent to its lowest level on record after the chairman of the Saudi National Bank, the largest shareholder of Credit Suisse, ruled out more assistance if required by the bank.

In the very early hours of March 16, the Swiss National Bank attempted to reassure depositors and global financial markets by offering to lend Credit Suisse up to CHF50 billion. This did not allay concerns with reported daily deposit outflows from the bank of circa CHF10 billion. Essentially, the crisis of confidence facing the sector sealed the fate of Credit Suisse as the bank was taken over by its larger rival, UBS Group AG, on Sunday evening.

While Maltese banks may have been labelled too traditional or ‘boring’, this is essentially a key strength especially at times of severe uncertainty

UBS acquired Credit Suisse for CHF3 billion, representing a 60 per cent discount on the already-depleted stock market valuation of Credit Suisse last week and a fraction of its book value of CHF42 billion. The Swiss authorities agreed to provide UBS with CHF9 billion of protection from losses it might sustain when disposing of unwanted parts of the bank and to extend CHF100 billion of liquidity assistance.

Finma, Switzerland’s regulator, said there was a risk that Credit Suisse could have become “illiquid, even if it remained solvent, and it was necessary for the authorities to take action”. The Swiss central bank said the takeover provided a solution “to secure financial stability and protect the Swiss economy in this exceptional situation”.

While many investors may fear that the recent developments are a repeat of the 2008/9 global financial crisis, which culminated in the bankruptcy of the US investment bank Lehman Brothers and major repercussions across the entire financial market, there are several economists and market commentators that were quick to point out that the original trigger of the financial crisis in 2008 (centred around poor-quality subprime mortgages) is not the same as today.

The main concern at the moment is that the rapid rise in interest rates is taking its toll on various bond positions held by all financial institutions.

Despite the adverse price movements across the bond markets, the general consensus is that the European banking sector is fundamentally very strong with much healthier balance sheets compared to the time of the 2008/9 financial crisis and high levels of liquidity.

During a webinar earlier this week, a senior economist indicated that circa 60 per cent of the liquidity across the European banks are in cash and reserves at national central banks. The economist mentioned Barclays Bank plc as an example with circa £500 billion in deposits and £318 billion in liquidity of which £248 billion is in cash.

As such, the conclusion was that Barclays would need to suffer deposit outflows of 50 per cent of their total deposit base before it needs to force-sell its bond holdings, although this would also not be necessary since these bonds are also accepted by central banks for access to immediate liquidity.

Another financial analyst mentioned the French bank BNP Paribas and the Italian bank Unicredit SpA that are similarly mainly funded by several thousands of retail investors which are themselves guaranteed and, therefore, unlikely to be susceptible to mass deposit outflows.

This is precisely the way that the main Maltese retail banks are mainly funded. While over the years, the Maltese banks may have been labelled too traditional or ‘boring’, this is essentially a key strength especially at times of severe uncertainty as experienced in 2008/9 and once again over recent days.

Incidentally, last week I made reference to a recent webinar in which the chief economist of the Central Bank of Malta, Aaron G. Grech, explained that Maltese banks remain very well-funded and are “incredibly liquid” which is a very important attribute of the local banking system.

Although sentiment undoubtedly remains fragile due to fears of contagion across other banks, most financial analysts and economists seem to agree that the demise of Credit Suisse should not trigger solvency or liquidity events for the main banks across Europe.

As one analyst said: “CS’s demise results from an accumulation of company-specific loss events, control failings and questionable strategic decisions that eroded investor and client confidence over a prolonged period”. Another well-known US-based investor remarked that “the peak of banking panic is likely behind us”.

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