How the US Banking Crisis Spread to Europe

In our last blog, we talked about the banking crisis in the United States that unfolded in 2023.
 

The period, marred with inflation, slow growth and high interest rates, was particularly bad for the banking sector as multiple banks collapsed in the US.
 

In March 2023, three banks, namely the Silvergate Bank, the Silicon Valley Bank (SVB) and the Signature Bank, collapsed in the country.

Recommended Read: 2023 US Banking Crisis

Next, the crisis spread to another bank in the US, i.e. the First Republic Bank, and then to Europe where Credit Suisse Group collapsed.

In this blog, we will talk about the story above which is the second part of the banking crisis.

But first, let’s go back to how it started. 

Recap

Following the 2008 global financial crisis, the Federal Reserve instituted a zero-interest rate policy.

Recommended Read: Revisiting the Global Financial Crisis

It led to the growth of very risky, no-profit but fast growth tech start-ups in the Silicon Valley.

These banks, i.e. the Silvergate Bank, the Silicon Valley Bank (SVB) and the Signature Bank, became the conduit of the booming industry—in particular, the technology and cryptocurrency sectors.

However, the Fed began to raise interest rates in the face on inflation during 2021-23 due to the COVID-19 pandemic and other geopolitical issues.

Subsequently, these banks began to lose gains in their investments, following which their customers queued up to withdraw their funds.

Consequently, an illiquidity crisis erupted at the banks which then began to sell their investments in securities and bonds at a huge loss.
 

• California-based Silvergate Bank failed to manage its illiquidity crisis. It announced on 8th March that it was going to voluntarily liquidate itself.
  
   
• California-based Silicon Valley Bank (SVB) was acquired by North Carolina-based First Citizens Bancshares. It was the third-largest bank failure in the US history.
  
   
• New York-based Signature Bank was acquired by the New York Community Bank for $38.4 billion in assets in a $2.7 billion deal. It was the fourth-largest bank failure in the US history.

Note that the Silvergate Bank and the Signature Bank was particularly focused on cryptocurrency sector.

The banking crisis further spiralled in the US and Europe. 

First Republic Bank (FBR)

FBR was a bank targeted towards high-net-worth individuals that was founded in California in 1985.
 

By the end of 2022, it was the first 14th largest bank in the country.
 

But as we approached March 2023, S&P Global reported that FRB has a sizable 68% of total deposits or $119.5 billion that are uninsured and therefore downgraded the bank's credit rating.
 

Note that in the US, a deposit above the Federal Deposit Insurance Corporation (FDIC) insurance limit of $250,000 is uninsured.
 

The possibility of a bank run at the FRB prompted eleven American banks, including JPMorgan Chase, Bank of America, Wells Fargo, Citigroup and Truist Financial, infused with $30 billion.

In addition, the bank was also infused with $70 billion in financing facility by JPMorgan Chase & Co.

However, S&P Global again downgraded the bank’s credit rating, arguing that the infused amount would not be able to solve the brewing crisis at the FBR.

The FBR saw withdrawals of more than $100 billion in March, but it noted that outflows had stabilised in April.

Towards the end of April, the FBR announced that it will sell its bonds and securities at a loss to raise equity. It was soon followed with several employees and advisors quitting.

Thereafter, there was news that FDIC was seizing the bank which caused its stock price to plunge more than 40%. The FDIC immediately took over the bank.

On 1st May, the California Department of Financial Protection and Innovation announced that FRB had been closed. The bank’s assets were sold to JPMorgan for $10.6 billion. 

Credit Suisse

The US is the largest economy in the world, and it has an enormous impact on the global economy.

Following the banking crisis in the US, the European banking sector also got impacted, given how closely it is tied to the US economy.

Credit Suisse Group AG is a global investment bank that is based in Switzerland. One of the largest banks in Europe, it also fell prey to the banking crisis in the US.

Let's look at the series of events that unfolded at the bank which led to its collapse.

Credit Suisse’s largest shareholder was the Saudi National Bank (SNB) with a share of 10%.
 

On 15th March 2023, SNB announced that it will not invest further in the Swiss bank due to the turmoil in the market.
 

Credit Suisse’s stock immediately declined more than 30% following the SNB’s announcement.
 

Similarly, Credit Suisse’s bonds fell by up to 10 cents per euro which prompted the bank to buy them bank.

For this purchase, Credit Suisse decided to receive a backstop from the Swiss National Bank as an emergency line of credit of $55 billion.
 

But customers continued to withdraw funds from the bank. As the situation worsened quickly, Swiss authorities asked the UBS Group AG to acquire Credit Suisse.
 

The Federal Department of Finance, Swiss National Bank and the Swiss Financial Market Supervisory Authority (FINMA) oversaw UBS Group’s acquisition of Credit Suisse. The deal cost more than $3.3 billion.
 

As per the agreement, Credit Suisse shareholders will receive one UBS share for every 22.48 Credit Suisse shares held.
 

In short, a major European bank collapsed as a result of the turmoil arising out of the US banking crisis. 

What Should BitDelta Users Know?

The banking crisis in the U.S. and Europe in 2023 was a wakeup call to the banking and financial institutions of the world. 

The collapse of the First Republic Bank was the second-largest bank failure in the US history, that of the Silicon Valley Bank the third-largest and that of the Signature Bank the fourth-largest. 

Most commentators believed that the global financial crisis of 2008 was history and nothing closer to such a crisis could happen again — at least, for the next few decades.

Note that the cryptocurrency sector was widely blamed for the banking crisis in 2023. However, it was one of the several factors responsible for the crisis.

We recommend that BitDelta users should learn about the 2023 banking crisis as it continues to loom over the economies of several countries even today.