Amidst a backdrop of aggressive monetary tightening aimed at combating inflation, pressure has been building up in the banking system, and in March 2023, some of this pressure surfaced. Silicon Valley Bank (SVB), a 40-year-old bank serving the tech sector in the US, announced on March 8th that it would incur losses of over USD 2 billion in equity, partly to cover bond losses. This triggered a withdrawal of USD 42 billion in deposits, equivalent to a quarter of SVB’s total deposits. Subsequently, on March 10th, Signature Bank, a New York lender, also failed, and a syndicate of US banks had to rescue First Republic Bank on March 17th to address potential contagion across the US banking sector.
In response to these events, the Federal Reserve and the Treasury Department in the US announced three measures. Firstly, they extended the guarantee of USD 250,000 to cover all depositors in SVB and Signature Bank, ensuring they would be made whole immediately. Secondly, the Treasury promised to provide similar support to smaller banks if needed. Lastly, the Fed established a new emergency-lending program that allowed banks to obtain cash in exchange for Treasuries or government-backed mortgages at face value, rather than market value.
In Europe, Credit Suisse (CS) faced its own troubles, which came to light on March 15th when its biggest shareholder, Saudi National Bank, ruled out further investment in the firm. This caused CS’s share price to plummet by a quarter to its lowest level ever, and other European banks also suffered. To address the situation, CS announced on March 16th that it would borrow USD 54 billion from the Swiss National Bank and buy back debt, which provided some support to its share price. However, this was not enough, and on March 17th, UBS came to the rescue by buying CS at a 60% discount, backed by CHF 100 billion in liquidity support from the Swiss National Bank and CHF 9 billion in protection from losses. Meanwhile, the Bank of England and the European Central Bank (ECB) also announced statements in support of the banking sector in case further assistance was needed.