The last month saw two major events unfold within the banking world. First, the US-based Silicon Valley Bank collapsed, resulting in the second-largest bank failure in the history of the United States. Barely a week later, Swiss banking giant Credit Suisse was taken over by rival UBS to prevent a major crisis at Credit Suisse from spilling over into the rest of the banking world and potentially creating a financial crisis on the scale of the one that happened in 2007 and 2008. But what exactly happened and how should these events be judged from a nationalist point of view?
Silicon Valley Bank: Following Rapid Growth, a Worst-Case Scenario
Silicon Valley Bank (SVB) was founded in 1983 by a former Wells Fargo executive and a Stanford University professor in order to offer financial solutions to start-up companies. SVB benefited hugely from the tech sector’s explosive growth in recent years, fuelled by ultra-low borrowing costs and a boom in demand for digital services. The bank’s assets (mainly consisting of loans to Silicon Valley start-ups) and deposits (from companies parking their cash at the lender) more than tripled from the end of 2019 to March 2022. During this period, its global headcount also more than doubled. But the good times did not last.
In 2022, higher inflation forced the Federal Reserve to raise interest rates, leading to higher borrowing costs for Silicon Valley companies. Combined with the fact that many of these companies have had financing problems in the last year, this prompted them to withdraw deposits with Silicon Valley Bank – a classic “bank run”. At the same time, the increased interest rates had also caused the low-interest bonds in which the bank had invested to be worth much less than their purchase price. The nightmare of every bank occurred to them – the value of SVB’s assets fell, while customers tried to withdraw their money. The bank was therefore forced to sell them at a loss to cover the withdrawals, until the point that there was almost nothing left. On the 10th March 2023, the bank was placed under receivership and became the second-largest bank failure in the history of the United States.
Credit Suisse: From a Conservative & Stable Swiss Bank to a Speculative & Global Bank
Credit Suisse was originally founded in 1856 by a group of Swiss industrialists and politicians as a commercial bank, with its main business being the funding of the development of Switzerland’s rail system. At the beginning of the 20th century, the bank decided to shift its focus to retail banking, which would remain its core business for many decades. At the end of the century, it discovered another lucrative field – investment banking. In 1988, Credit Suisse took over US investment bank First Boston, a leader in underwriting tech IPO’s during the “.com” craze (most notably Amazon.com and Cisco Systems). The now highly diversified bank emerged from the subprime crisis relatively unscathed and was not strongly impacted by the relaxation of Swiss banking secrecy laws in the years after that either. So far, so good. Again, the good times did not last.
In 2015, the Congolese-born, French-educated Tidjane Thiam took over as CEO. Not long after that, scandals started erupting. Thiam was forced to quit after having hired private investigators to track former high-calibre employees of the bank. In March 2021, the US-based, highly leveraged Archegos Capital Management (a family office that managed the personal assets of Korean-born investor Bill Hwang) defaulted on margin calls. Credit Suisse was an important counterparty for them and suffered a high loss as a result. Around the same time, the bank also took a hit from the freezing of billions of supply chain finance funds linked to British financier Greensill when they had to file for insolvency protection. Finally, in the summer of 2022, Credit Suisse was found guilty of money laundering. Allegedly, a former relationship manager willingly and knowingly helped launder more than 150 million Swiss Francs for a cocaine gang (including several tens of millions in cash stuffed into suitcases).
In 2023, investor sentiment regarding banks generally declined as a result of the failure of Silicon Valley Bank and problems at other mid-sized US banks. Credit Suisse also admitted to having “material weaknesses” in reporting and, like Silicon Valley Bank, had to cope with massive outflows. The stock price nosedived. After its largest investor, Saudi National Bank, refused to provide additional financing, Swiss authorities decided to step in to find a solution. Because of public anger at the Swiss authorities’ 2008 rescue of UBS with government funding, no such rescue of Credit Suisse was considered feasible now. However, many have pointed out that a full state takeover might have been better. Were the failures of both banks truly unavoidable?
Silicon Valley Bank: A Textbook Example of “Go Woke, Go Broke”
Silicon Valley Bank obviously was not able to cope with the increase in interest rates. However, being prepared for such a scenario isn’t actually all that difficult. An adequate risk management system will consider the consequences of higher interest rates and, if need be, take positions in financial instruments that provide protection against this, so that this scenario would not lead to the firm going bankrupt, with employees losing their jobs and customers and creditors losing their money. Did the rapid growth perhaps go to their head, leading them to ignore risks and focus on pointless things? Many things point to the latter. For the most part of 2022, the bank actually did not have a chief risk operator. One major risk officer seemed to be a diversity hire – Jay Ersapah, the now-former Head of Financial Risk Management and Model Risk for Silicon Valley Bank UK Limited, is a woman of Indian heritage who described herself as “queer” and introduced many LGBT initiatives at the firm, including a month-long Pride campaign and “safe space catch-ups” for staff. Furthermore, the bank’s 2022 Environmental, Social & Governance (ESG) report was full of the “language of diversity”, noting that they had implemented “a diverse candidate slate for US leadership roles”, announcing the introduction of its “first six Employee Resource Groups for Asian, black, Hispanic, LGBTQ, veteran, military and female employees” and informing about its own program “designed to advance inclusion and opportunity in the innovation economy – particularly for women, black and Hispanic individuals”.
Credit Suisse: Stay True to Your Roots
As for Credit Suisse, the root of the problem seems to be that the bank can hardly be called Swiss anymore. Active worldwide as a major player in the ultra-liberal global financial markets and mainly owned by foreign stockholders, Credit Suisse is a good example of a stable bank providing added value to its nation’s economy that has since degenerated into a just another cog in the globalised capitalist machine. As a consequence, they became too focused on short-term profit, prone to corruption and difficult to manage and control.
Banks should focus on accepting deposits, providing loans, financing long-term projects and investing conservatively – not on speculating, contributing to a borderless, stateless world and being involved in corruption. Will other banks have learned any lessons from this? The unfolding of this crisis going forwards into the future will be interesting to follow.
Maarten
ETN Guest Writer (The Netherlands)
