Market Round Up

When central banks started raising rates last summer, the general perception was that the first thing to break would be consumption, followed by job losses. Few anticipated that the banking sector, expected to thrive under a higher interest rate environment, would be caught in turmoil, leaving investors wondering whether there are undisclosed financial weaknesses at their banks.

The Californian-based Silicon Valley Bank (SVB) was the first domino to fall. The 16th largest US bank, which mostly lent to start-up tech and life science companies, collapsed after being unable to meet clients’ withdrawal requests. As soon as SVB announced that it needed to raise capital, customers panicked and triggered a run on its deposits, resulting in a liquidity crisis at the bank. The speed at which clients withdrew their funds from SVB shows how quickly a bank run can take place in the digital age, with SVB’s customers trying to withdraw funds at nearly US$500,000 a second on Thursday 23rd March.

Silicon Valley Bank had been heavily invested (55% of assets) in fixed-income securities, including significant investments in US Government bonds. The issue was that sovereign bond prices globally had fallen considerably over the past year, with yields soaring on central bank rate hike expectations. This resulted in the bank incurring heavy losses when it was forced to sell fixed-income holdings for a considerably lower price than they were purchased for.

SVB’s demise sparked panic in the markets as investors started looking at other banks that could be sitting on large unrealised losses on their assets. The Treasury, the US Federal Reserve (Fed), and the US President rushed to reassure depositors that their money was safe. However, another crisis was brewing in Europe.

Investors had been watching the slow decline of the 167-year-old Credit Suisse over the years, mainly attributed to its accounting errors, its involvement in multiple scandals, billions in losses, several turnaround plans and more. However, the final straw came after its largest shareholder, speaking on behalf of Saudi National Bank, of which he is the Chairman, Ammar Al Khudairy, said he would “absolutely not” buy any more shares in the business following the announcement that the bank had found ‘material weaknesses’ in its financial reporting. The share price plunged to an all-time low, and the bank was left requiring an emergency US$54bn backstop from the Swiss central bank.

By last weekend, it had been announced that Switzerland’s largest bank, UBS, would purchase the troubled Credit Suisse in a below-market purchase of US$3.25bn in a deal supported by the country’s government, aiming to avoid a major bank collapse that could have triggered wider fallout. As part of this deal, the Swiss regulator requires US$17bn of Credit Suisse’s additional tier 1 debts to be written down to zero. This has once again spooked investors and has led to a sell-off in other bank debt which has significantly impacted the share prices.

In March alone, investors have wiped US$459bn from the value of bank shares around the world in the worst rout for the financial sector since the COVID-19 pandemic, with recent events providing an eerie reminder of the days of the 2008 global financial crisis. This resulted in an unusual display, when six central banks around the world joined hands in order to reassure financial markets. However, despite the echoes of events 15 years ago, there are few indications that a 2008-style crisis is in store, with the banking system in a stronger position to withstand shocks following rules imposed previously.

In the UK, the Bank of England has increased interest rates by a quarter of a percentage point to 4.25%, despite the turmoil experienced in the banking sector in recent weeks. The move marks the 11th consecutive rate increase from the bank, which started raising rates in December 2021. Seven of the Monetary Policy Committee’s nine members voted for the rate increase with the rise coming in line with economists’ forecasts and following suit with both the Fed and the European Central Bank.

The meeting followed the economic data that was released earlier in the week which stated that the UK’s annual rate of inflation increased from 10.1% to 10.4% in February. The unexpected rise in inflation was due to broad based price rises across multiple sectors and has reinforced fears that price rises are increasingly being driven by domestic pressures in the domestic services sector, rather than the external shock of high energy prices. UK core inflation, which strips out volatile food, energy, alcohol and tobacco prices, rose sharply to 6.2% and is now 0.7 percentage points higher than that of the US.

Please note that this communication is for information only and does not constitute a recommendation to buy or sell the shares of the investments mentioned. The value of investments and any income derived from them may go down as well as up and you could get back less than you invested.