Media provided by Ryan Born on Unsplash.
In a scene reminiscent of the 2008 financial crisis, the banking industry has experienced almost unprecedented turmoil in recent months, with a series of significant events that have shaken and shaped the financial world going forward.
These events have included the failure of Silicon Valley Bank, the acquisition of Credit Suisse by its largest competitor, UBS, and finally, most recently, the purchase of First Republic Bank by JP Morgan Chase & Co. The worst has seemingly passed, but we are left with the question of how this could happen in the first place?
On March 10, 2023, a run on a Silicon Valley Bank caused it to file for bankruptcy, marking the largest bank collapse since the failure of Lehman Brothers in 2008. While not as large as JP Morgan Chase or Bank of America, Silicon Valley Bank was a central regional bank with over $200 billion in assets, employing 8,000 people, whose assets spanned over three continents. The bank specializes in tech by providing tech and venture capital firms loans. These early investments in venture capital firms would pay off as many became the biggest firms in the valley, giving early startup capital to companies like Slack, Uber, and even Facebook. Silicon Valley Bank was a staple of the California finance community. It made it even more surprising when the bank suddenly collapsed when its share price dropped by over 60 percent due to deposit outflow (Reuters).
Silicon Valley Bank’s failure resulted in 8,000 people being out of work and $42 billion in depositors’ money being lost (Bloomberg). While this was first seen as an isolated incident, it soon became apparent that this was part of a more significant trend.
On March 19, 2023, Credit Suisse was reluctantly acquired by its largest competitor, UBS. Credit Suisse was widely considered the smallest of the “too big to fail” banks, as it had major investment banking operations in the United States. While it was considered one of the smallest, it still had considerable assets nearing $! trillion by the end of 2020. While it was one of the largest banks in the world, since the 2008 financial crisis it had been in steep decline, which was only hastened by a series of legal issues and PR disasters that resulted in the value of its assets dropping by more than 47 percent inthree years (Ycharts).
It was only a matter of time before UBS would crash, and the recent failure of other moderately sized banks was the final nail in the coffin. As depositors began to take mass amounts of money out of the bank to put into larger commercial banks, Credit Suisse took out $54 billion in loans from SNB, sending Credit Suisse shares skyrocketing, but it was too late (CNBC). Only a day later, in a move that shocked the financial world, the banking giant UBS, in a government-brokered deal, agreed to acquire Credit Suisse for a bargain bin price of 3 billion. The ultimate result was over 12,000 jobs being lost (Reuters) and 69 billion of depositor money being lost.
On May 1, 2023, JP Morgan agreed to purchase First Republic Bank after it went up in flames, resulting in the second-largest bank failure in United States history. First Republic Bank had always been on the rocks, as in the earlier days of the crisis, there had been unanimous concerns about First Republic Bank’s liquidity(The New York Times). However, most financial institutions believed that First Republic had reorganized their portfolio substantially enough to remain stable; their internals told a different story as the bank revealed a 41 percent outflow in deposits (Forbes). This led to a scene reminiscent of JP Morgan’s acquisition of Bear Stearns only 15 years ago as JP Morgan agreed to purchase First Republic Bank for eight dollars a share, a 95 percent decrease from its share price in March(. First Republic Bank also had over 200 billion in assets, employing nearly 8,000 people; all of these assets were purchased for a sum totaling $10 billion (JP Morgan Chase). The purchase is expected only to expand JP Morgan’s already considerable footprint in key markets of California and New York. The bank ultimately lost a $100 billion in depositor assets and nearly 3,000 jobs.
It’s important to note that between these three examples, countless regional and smaller banks collapsed, which have only further consolidated the US banking industry into a select few multi-national players. The US government response was swift as regulators were brought on almost immediately to stabilize the entire industry. However, there has not been a single solution put forth to stop this from happening any further as Washington gridlock sets in and the true culprit remains unclear.
There is not a single culprit to blame for this crisis; instead, a plot of them. The first culprit is global economic uncertainty fueled by ongoing geopolitical uncertainties, trade disputes, and the war in Ukraine.
Additionally, the lingering effects of Covid-19 are still felt throughout the banking industry. However, these have only acted as a spark that has started the fire. A low-interest rate economy and financial technological development initially fueled this fire.
The interest rates of the last 20 years have been unprecedented, creating a banking culture that pressures bankers to cut costs, consolidate the industry further, and take riskier positions. This meant that when interest rates rose to historic heights, the banks were left with assets that were now considered to be inflated that they could only sell for a loss.
Additionally, the rise of fintech companies and the rapid adoption of digital banking services has forced traditional banks to innovate and act riskier, which hurts their depositors in the long run.
While these are the driving forces of the recent failures, there are likely a multitude of others that have yet to be discovered. This current crisis will be similarly studied for decades to how the 2008 financial crisis was studied, and we will only begin to realize the full scope of this year from now. If precautions are not taken, a situation like this will undoubtedly happen again as institutional banks look to become riskier and riskier in the face of technology.
Jackson Howard ‘23, the author, is a staff writer for The Grace Gazette.