Cracks appear in the global banking landscape

09 May 2023

In the banking world, big is beautiful - most of the time.  United States (US) giants, JP Morgan, Citigroup and Wells Fargo bore no scars from the regional banks’ crisis in March. With depositors panicking and fleeing from the mid-sized banks, the US giant banks, those considered ‘too big to fail’, benefitted from huge deposit inflows without having to pay a rate premium for them.

US regionals banks crisis

Silicon Valley Bank (SVB) is the second largest bank to collapse since Washington Mutual during the Global Financial Crisis in 2008. It had $209 billion in assets, two-thirds the size of Washington Mutual and banked half of the venture capital firms in the US. In September 2008, Washington Mutual experienced $15 billion of deposit outflows in the space of 12 days. But in an era of internet banking, we witnessed SVB losing $42 billion of deposits in one day (9 March 2023). The cause of SVB’s collapse is multi-faceted. There was first and foremost poor risk management, with the bank not even having a head of risk in place. 

While the asset side of the balance sheet was also peculiar, with 40% of assets held in volatile marketable securities (government bonds and mortgage-backed securities). And on the liability side, only 5% of deposits were sticky retail deposits, which would be covered by Federal Deposit Insurance (with a threshold of $250 000).

But the current crisis has roots in regulatory missteps dating from the Trump era. In 2018, the Dodd-Frank Act, which stringently regulated US banks with assets over $50 billion, was rolled back by the US Congress requiring only banks with assets over $250 billion to comply. This set the scene for the current turmoil.  Bank failures are a common event in the US. This may come as a surprise to South African investors given the level of concentration in our banking market. In fact, the US has over 4 000 regional banks, which makes mergers and acquisitions and failures common occurrences. Since the Global Financial Crisis, the number of banks has been shrinking on average by 16 a month and there have been at least two bank failures a month.

Not too big to fail

Global financial giant, Credit Suisse also released its annual report in March noting that material weaknesses had been found in the bank. Shortly after, the Chairman of the Saudi National Bank, a key shareholder of Credit Suisse, was quoted saying in an interview, that they would not provide any financial support to the Swiss giant if they decided to raise capital. Credit Suisse went into free fall with the share price dropping 24% in a day – with the market cap shrinking to the size of Nedbank – the smallest of our Big Five commercial banks. 

The Credit Suisse sell-off forced the Swiss National Bank to inject 50 billion Swiss francs into the bank. The contagion effect from the US regional banks crisis and the severe sell-off of Credit Suisse impacted banks across the world, with the scars from the Global Financial Crisis a not-so-distant memory. Credit Suisse has been in trouble for a while. It was fined in the US for selling toxic securities before the Global Financial Crisis and in 2021 lost $5 billion when the family office, Archegos Capital Management, defaulted. Last year, the new management team promised to review its risk management culture, consider restructuring the business by separating its investment bank from its traditional wealth management business in order to stem losses. Credit Suisse issued shares to raise new capital, bringing in the Saudi National Bank as its largest shareholder. However, this did not help restore confidence with clients withdrawing some CHF138 billion of deposits (2.8 trillion rands). With $556 billion of assets, Credit Suisse was more than double the size of SVB and its collapse would constitute a systemic risk to the European Banking system.

Towards the end of March, Swiss authorities forced UBS, another Swiss giant, to acquire their 166-year-old rival for $3.3 billion – a 70% discount on an already beaten-down market valuation. Investors in the debt to the tune of $17 billion were wiped out. Given its importance, it is likely that the Swiss National Bank and the European Central Bank would continue to lend financial support to the Swiss giant. Credit Suisse may have been big but definitely not beautiful!

South Africa: Are we safe?

 The South African banking system is far more consolidated with the Big Five banks dominating the landscape. The asset side of the balance sheet of our banks does not have an overconcentration of securities which have to be marked down as was the case for the US banks. On the funding side, our banks have a healthy split between wholesale and retail funding. Deposit bases have been growing steadily over the past year, unlike the huge outflow of deposits from Credit Suisse which led to a deterioration in the liquidity coverage ratio from 192% to 144% at the end of 2022. In addition, exchange controls create a protective layer whereby there is only minimal leakage from our banking system. After delivering a record R110 billion in profits last year – up 16%- our Big Five banks are in a strong financial position to weather any global storms.