More banking failures after recent exposure to risks and misjudgment of interest rate hikes. [Long Read]
Insights regarding Credit Suisse, Silvergate Bank, and Silicon Valley Bank.
Credit Suisse CS 0.00%↑ (-65.30% YoY)
A Swiss multinational investment bank which has been in operation for over 160 years, and has been hit by several financial scandals, leading to a significant loss in its reputation and financial stability. The bank has been accused of taking excessive risks in its investments, leading to significant losses. In 2015, Credit Suisse(CS) was fined $2.6 billion for aiding American citizens to evade taxes. The bank was also involved in several other financial scandals, including money laundering and fraud. These scandals have eroded the public's trust in the bank, leading to a massive outflow of funds. The COVID-19 pandemic has also had a significant impact on the bank's stability. The pandemic has caused a global economic slowdown, leading to a decline in the bank's revenue. The bank has also faced increased regulatory scrutiny in recent times. The Swiss Financial Market Supervisory Authority (FINMA) has launched investigations into the bank's conduct, leading to fines and a loss of reputation.
CS was recently exposed to 2 major losses that spooked more clients back in 2021. First is after winding down its $10 billion supply chain finance funds invested in notes backed by specialty finance firm Greensill that later filed for insolvency and in talks to sell parts of its business to a U.S. private equity firm. And of course the legendary Archegos Capital implosion, managed by the legend Bill Hwang who lost a total of $20 billion in just 2 days. TWO. DAYS.
The implosion affected many other banks aside from Credit Suisse(-$5.5 billion) and Nomura(-$2.5 billion) that costs banks a total of $10 billion. At the time of writing, CS’s situation is getting more and more dangerous for the global financial system given that CS is part of the 2022 Global Systemically Important Banks. (https://www.fsb.org/wp-content/uploads/P211122.pdf)
Unfortunately, things are getting bananas, CS stock was down after the Security and Exchange Commission called to look into their cashflow statements back in 2020 and 2019 and will now delay the publication of their annual report. Also earlier this week CS’s largest shareholders, the asset manager Harris Associates has now fully exited its position.
Credit Suisse, Silvergate Capital, and Silicon Valley Bank’s log charts. (NFT potential)
Silvergate Capital SI 0.00%↑ (-97.96% YoY)
Silvergate Capital Corps.’ Silvergate Bank(SB) experienced significant growth in the early 2000s. It expanded its services and started catering to other industries, including digital currency companies, non-profits, and technology firms. The bank's focus on developing relationships with growing industries helped it increase its assets and deposits. By 2020, the bank had over $2.3 billion in assets and $1.8 billion in deposits.
In 2017, the popularity of cryptocurrencies boomed, and SB became the go-to bank for digital currency companies. The bank's CEO, Alan Lane, recognized the potential of the crypto industry and invested heavily in blockchain technology. The bank started providing services to several cryptocurrency exchanges and wallets, including Coinbase, Bitstamp, and Kraken. However, the crypto industry's volatility took a toll on SB's financials. In 2018, the bank reported a significant drop in net income due to losses on cryptocurrency positions. The bank's shares also plummeted, losing over 50% of their value in just a few months.
Now, the known crypto-friendly bank closes its exchange network or SEN which facilitates billions of dollars to flow in the markets and enables transfer to the largest companies in cryptocurrency. Huge amount of trading volume and the crypto market cap are from these companies.
When the crypto market started collapsing in early 2022 SB was questioned regarding its solvency because they offered Bitcoin-Backed loans and famously lent MicroStrategy over $200 million with BTC as collateral. SB CEO said that SEN allowed them to sell their BTC and holds cash and only customer crypto assets are held making them robust compared to regular banks. Unfortunately, FTX and Alameda used their Silvergate account to move customer assets that led to speculations that SB might be aware that something bad is going to happen.
Their lack of exposure to the FTX-Alameda collapse caused a relief rally that didn’t last long after SB faced class-action lawsuit over FTX and Alameda dealings. And earlier this year SB withdrawals accounted to $8.1 billion that made them sold assets at loss and cut 40% of their staff to cover the amount. And just this month, they announced the delaying of their annual report that caused their stock to plunge 31% due to doubts regarding their future and made Sivergate the most shorted stock.
Events led them to voluntarily liquidate their assets and intends to wind down operations. Due to tightening regulatory pressure, other crypto related banks like Metropolitan Bank has exited crypto and Signature Bank; the only viable option for crypto companies announced last December that they will reduce crypto related deposits as much as $10 billion.
Silicon Valley Bank SIVB 0.00%↑ (-88.48% YoY)
For many years, Silicon Valley Bank (SVB) was known for its innovative banking solutions and its focus on the technology industry. The bank was one of the first to provide financial services to startups and venture capitalists, and it quickly gained a strong reputation within Silicon Valley. Over the years, SVB expanded its operations to other parts of the US and other countries, including China, India, and the UK.
However, in recent years, SVB has been rocked by a series of scandals and controversies. In 2016, the bank was fined $29 million by the Federal Reserve for violating anti-money laundering laws. The bank was found to have failed to implement adequate controls to prevent money laundering, and it was accused of processing transactions for clients who were involved in illegal activities. SVB was criticized for not doing enough to prevent the fraud and for not properly vetting its clients.
This week, SVB disclosed it took a loss on the sale of bonds due to rising interest rates and announced it would sell shares to shore up its balance sheet. The announcement also caused their stock price to plunge and customers rushed to take their money out. Banking collapses just this week drove wall street lower with the banking sector down more than 4%. Concerns of the bank collapse rose as more startup companies realized that the FDIC's per depositor guarantee only amounts to $250,000 which may not be sufficient to pay bills or make payroll.
According to Emily Flitter of The New York Times, the bank failure came due to mismanagement and current market conditions. SVB held a lot of long-term investments like treasury bonds and mortgage-backed securities but due to their misjudgment of the market conditions and properly assessing the risks of rising interest rates they had to sell these financial instruments at a loss.
Final thoughts
Starting with Credit Suisse’s restructuring plans, it could be difficult but definitely doable. The critical question for CS shareholders is whether it can turn things around. It’s undergoing its second major overhaul in as many years under CEO Ulrich Koerner, who is spinning off its investment bank and shifting the focus to wealth management. It has also removed about 9,000 jobs to cut costs. CS is “too big to fail” type of bank which makes it more resilient than the other 2 banks mentioned. BUT, after the recent events that happened this early March, speculators are now saying that CS might be next in line. CS’s five-year Credit Default Swaps (CDS) are now at all time high, wait where did I hear about CDS’s at all time high?
Right, Lehman Brothers, 2008 financial crisis. And all we can do is wait for the events to unfold after Credit Suisse file their annual report. Next, Silvergate Bank, well its gone now, and they did a great job covering customer withdrawals without the Federal Deposit Insurance Corporation (FDIC) intervening. The problem is with Signature Bank and how well can they handle regulatory scrutiny if the government comes after them. Another is how will crypto companies get access to banks, well no one knows for now. Lastly, Silicon Valley Bank, its a developing story but recent reports highlighted the exposure of startup companies such as Roku, Roblox, Quotient, and others. ALSO, 2hours ago at the time of writing, Circle, operator and issuer of the largest crypto stablecoin $USDC reported that $3.3 billion of its reserves are trapped in SVB that caused the stablecoin to depeg from the U.S dollar.
So the question is, are we heading for another 2008 like financial crisis?