In 2023, there were a few regional bank failures in the United States and Credit Suisse was also declared insolvent and ordered to merge with UBS.

Events

  • The Federal Reserve hikes interest rates in response to inflation.
  • Silicon Valley Bank and First Republic Bank in the US have seen the value of their US Treasuries plummet, causing them to become insolvent.
  • Credit Suisse is also put under regulator action and taken over by UBS.

Explorations

Are larger banks at risk of what happened to Silicon Valley Bank?

Source

  • The short answer is no
  • Liquidity Coverage for other larger banks is healthy
  • Losses on Held-to-Maturity securities (which can be hidden because they are recorded in the balance sheet at amortized cost) are pretty large for these banks, but:
    • they do not exceed Common Equity Tier 1 (CET1)
    • they are hedged by a large amount of interest rate swaps
    • Silicon Valley Bank had no chief risk officer for 8 months and that reflected in the fact that they didn’t really have anything to hedge the risk of rising interest rates on their held-to-maturity portfolio
  • It seems to be a trend that when tech meets finance, the result is quite messy. Are many fintech firms just regulatory arbitrage?