Global banking system turmoil

On March 10, Silicon Valley Bank (SVB) was closed by regulators, marking the largest US bank failure since the Global Financial Crisis in the late 2000s (and second largest in US history). On March 12, state regulators in New York closed Signature Bank. And on March 19, the Swiss National Bank helped facilitate the purchase by UBS—Switzerland's largest bank—of Credit Suisse.

Here's what's been happening in the global banking scene.

What happened in Europe?

Whereas some regional banks only gained attention for their troubles recently, Credit Suisse had been showing worrisome signs for some time. Well before UBS agreed to buy Credit Suisse for $3.1 billion, a myriad of scandals had plagued Switzerland's then second-largest bank. More recently, the cumulative effect of frequent management turnover, massive investment losses, regulatory changes, and an increasingly difficult environment for some banks brought Credit Suisse to the precipice of failure. 

After SVB failed, scrutiny for many banks increased, and the tipping point for Credit Suisse came when, just before it was sold to UBS, their largest investor—the Saudi National Bank— declined to inject a needed capital infusion into the faltering Swiss bank.

What happened to the regional banks?

Several factors led to the collapse of SVB. Most of SVB's clients include tech and venture capital companies, in addition to executives for these firms. In an effort to attract clients, SVB offered relatively higher rates on deposits compared with many larger rivals. To help fund these higher rates, SVB bought longer-term, higher-yielding bonds when it was cash rich. But that was before the Fed began aggressively hiking rates and the venture capital market experienced some turbulence. The value of most of those bonds SVB purchased declined substantially (bond values generally decrease as interest rates increase), resulting in big investment losses.

"This was a classic asset-liability mismatch, triggered by higher rates, and compounded by leverage," according to Jurrien Timmer, director of global macro at Fidelity. "Some banks have offered to pay higher rates to their depositors, but as the Fed has raised rates and bond values decreased, banks like SVB took losses on their bond assets."

Complicating the situation, SVB kept a lower level of deposits on hand and invested a greater percentage of its capital in order to try and pay its relatively higher rates. Consequently, SVB had been on looser footing than most other banks.

Additionally, some have speculated that SVB developed a reputation for having not-as-strict lending standards. It is speculated that the quality of loans to some riskier venture-backed companies with deposits at SVB had deteriorated over the past year. Many of those firms have come under significant financial pressure as rates have risen and securing capital has become more difficult compared to the low interest rate environment from just a couple of years ago.

After SVB announced that it lost $1.8 billion in asset sales, the bank failed to secure additional investment capital and many customers rapidly withdrew deposits. Everything culminated with the regional bank's seizure by regulators.

Like SVB, Signature Bank’s clients included many tech and venture capital companies, and in the aftermath of SVB’s failure, those clients similarly rushed to withdraw their funds from Signature, triggering its collapse.

"There's an old adage that says the Fed tightens until something breaks," Timmer adds. "It looks like we have a sense of what is breaking during this Fed cycle."

While there was initially a lack of clarity over what might happen to SVB and Signature Bank depositors who held more than what the FDIC standard insurance will cover ($250,000 per depositor, per insured bank, for each account ownership category), the Fed, FDIC, and Treasury decided all depositors would have access to all their money starting Monday, March 13.

What it means for investors

Investors in SVB are likely to receive little to no value for their shares. Credit Suisse investors will receive a fraction of the value that the company was previously worth. But the spillover implications for other financial companies, markets, and the economy may be limited.

"In my view, this does not appear to be a situation that could become large in scope like the sub-prime mortgage collapse did in 2007," Timmer notes.

Matt Reed, manager of the Fidelity^® Select Financial Services Portfolio (), thinks the impact on the financial sector and broader market will be limited as well. The stock market has thus far reacted favorably to the response to the Credit Suisse situation. And SVB may not be the canary in the coal mine that some might have expected it was.

"SVB was a unique bank that grew rapidly in a very specific niche industry, while the broader banking system is regularly stress-tested, has added meaningful liquidity and capital over the past decade, and has worked to manage balance sheets conservatively," Reed says. "While markets are likely to worry, it doesn't look like there is meaningful spillover into the broader banking system and the economy."