What’s next for the banking system?

Hah, if only we knew. What we do know is that the largest US bank failure since the 2008 financial crisis is calling the stability of the banking system into question. 

Catch-up: Silicon Valley Bank (SVB) is currently under the control of the US government through the Federal Deposit Insurance Corporation (FDIC), and its deposits have been fully rescued in a miraculous turn of events. Up north, the bank’s Canadian arm has been seized

  • The FDIC’s decision to save SVB’s clients this week—without the use of taxpayer funds, mind you—and leave executives and shareholders hanging is a big deal.

  • If they hadn’t, the trust that US customers have in their own bank’s ability to securely store their funds (which holds the whole system together) would have been shaken. 

Driving the news: Despite bank stocks enjoying a slight but promising rebound on Tuesday, news of a potential funding crunch faced by Credit Suisse quickly soured markets again. The bank’s stocks fell by 24%, sparking a broad sell-off in global bank stocks, until regulators intervened in the late afternoon to offer a lifeline to the lender, per The Wall Street Journal.  

  • Some analysts note Credit Suisse may be an isolated case given its particularly poor management, but the response will be sure to ease concerns in the rest of the sector. 

Why it matters: While some analysts worry that SVB will go down in history as the first domino to fall in the banking system, it’s not yet clear if it’s just one of a few bad apples or an early warning of higher interest rates starting to break down bits of the financial system. 

  • The US Fed has raised concerns over asset and liability imbalances, a result of some firms piling money into assets that have fallen in value as interest rates have risen.

  • This week, BlackRock CEO Larry Fink warned that we could see “more seizures and shutdowns” as part of a “slow rolling crisis” in the US financial system.

In Canada: Banks don’t face the same vulnerabilities as SVB, mostly because the country’s financial system is made up of a few national banks with assets diversified across industries. It means slumping performance in one sector can be levelled out by gains in another… but that’s not to say pain won’t be felt if banks in the US and EU start to break.—SB