Executive summary:

• The factors that led to the collapse of SVB are very different from the factors that led to bank failures during the Global Financial Crisis

• The Fed launched a new facility, the Bank Term Funding Program, to help banks under pressure

• The Swiss National Bank will backstop Credit Suisse

On the latest edition of Market Week in Review, Senior Director and Chief Investment Strategist for North America, Paul Eitelman, and Research Analyst Laura Bardewyck discussed recent turmoil in the global banking system, including the collapse of Silicon Valley Bank (SVB) and Signature Bank as well as concerns over the financial health of Credit Suisse.

How does the collapse of SVB differ from GFC-era bank failures?

Bardewyck and Eitelman kicked off the conversation by examining what led to the recent closures of SVB and Signature Bank. Eitelman started by stressing the importance of understanding how the failure of these banks contrasts with the wave of bank failures during the Global Financial Crisis (GFC) of 2008-09. The GFC, he explained, was essentially a credit risk event brought on by the lackluster underwriting standards of banks. This, when combined with plunging home prices, led to countless delinquencies and defaults on loans, he said. “The situation today is quite different, as it’s more of a duration risk event, Eitelman stated.

He explained that SVB was a fairly unique bank, due to a highly concentrated business model where a large amount of deposits came from start-up firms and other technology entrepreneurs. The tech sector in particular has come under challenges during the past year, Eitelman said, as capital raises have declined. Because of this, companies have had to draw down their deposits in order to sustain their businesses, he explained. In the case of SVB, this led to the need to raise money to fund its deposit outflows.

“The unique challenge SVB had was that the assets that were backing the deposits were in long-duration Treasuries. Although these assets are considered to have minimal credit risk, they can be more vulnerable to rising interest rates than shorter-duration assets. With the U.S. Federal Reserve (Fed) having raised rates so quickly over the past year, these Treasuries were trading below par value—which meant that when SVB sold them, it had to realize a large loss,” Eitelman said. This sparked concerns among depositors, he added, which led to an extremely fast run on the bank.

What is the Bank Term Funding Program?

Shifting to the U.S. government’s response, Eitelman noted that the Fed and the FDIC (Federal Deposit Insurance Commission) stepped in forcefully on March 12 to backstop the U.S. banking system with two important announcements. The first was a full guarantee on both insured and uninsured deposits at both SVB and Signature Bank, he said, characterizing this as a very important move. The FDIC has the authority to extend protection to uninsured deposits if doing so can help avoid systemic risks. “While the protection wouldn’t necessarily automatically apply to future bank failures, there is still a strong implicit signal in this step that the government would potentially intervene to protect depositors in other banks. This announcement was clearly designed to help slow down or stop other banking runs that were in the beginning stages,” he said.

The second announcement was the launch of a new facility by the Fed called the Bank Term Funding Program (BTFP), Eitelman said. The program ensures that going forward, banks that are under pressure won’t have to sell their Treasuries at a loss, like SVB had to, he said. “With the BTFP, banks will be able to post their Treasuries as collateral at the Fed. Importantly, they’ll be able to do this at full par value—not at the marked-down current prices—and use this to tap liquidity from the Fed to meet any of their liquidity needs,” Eitelman explained.   He believes it will probably be quite effective in limiting systemic risk in the banking system.

Swiss National Bank to backstop Credit Suisse

Bardewyck and Eitelman wrapped up the segment with a look at the problems facing Swiss bank Credit Suisse. “Essentially, Credit Suisse has had some badly timed bad news,” Eitelman said, explaining that the Swiss lender announced on March 14—amid the aftermath of the failures of SVB and Signature Bank—that it had uncovered material weaknesses in its internal controls. While these weaknesses related to events from previous years, the announcement was enough to create some anxiety for investors, he remarked.

The situation for Credit Suisse worsened the following day, March 15, when its top investor, Saudi National Bank, stated that it was both unwilling and unable to put more equity capital into the bank, Eitelman explained. “This created more anxiety in financial markets, on top of all the worries that already existed due to the turmoil in the U.S. banking sector. In these types of situations, investors tend to circle what they think are the next weakest links in the system—and that’s exactly what happened to Credit Suisse,” he said, noting that shares in the Swiss lender hit a record low in the wake of the news.

Fortunately, the Swiss National Bank intervened in a big way the night of March 15, Eitelman said, by issuing a statement declaring Credit Suisse’s balance sheet strong in terms of both capital and liquidity. Switzerland’s central bank also said it would backstop Credit Suisse with up to $54 billion in capital—an offer Credit Suisse accepted on March 16, he noted.

“While this remains a very fluid situation, at the moment, Credit Suisse is bouncing back a little,” Eitelman said, characterizing the latest developments as incrementally good news and perhaps a sign that conditions are stabilizing a bit.