Market Update for March:
Size matters …

Financial headlines throughout March focused on large and well recognised banks on both sides of the pond receiving government help in order to avoid major disruptions.

Two of the banks in question were Silicon Valley Bank (”SVB”) and Credit Suisse. While some in the media would have you believe that we’re seeing a rerun of 2008, with talk of bank runs and financial collapse, the real picture can only be seen by looking at each of these two institutions in isolation, not broadly associating them with the wider world of finance.

An irony about SVB’s collapse in comparison to what happened in 2008 is that the bank had invested in long term Treasury Bonds, which are thought to be as safe as can be. Awash with capital from startups and tech companies who flourished during the pandemic, long dated bonds seemed a safe and smart bet for SVB in light of the low interest rates since the recent financial crisis. This is in complete contrast to 2008 where the investments being made by banks were very high risk.

However with the aggressive interest rate rises dished out by the Federal Reserve, these long dated bonds lost much of their value. When the tech sector started to take a hit last year, those start ups slowed their investments into SVB, creating significant cash flow problems. This was the cause of the bailout.

Over in Europe, Credit Suisse was also in the headlines. A name and a sector that is associated with being steady and even stoic was discovered to have a very high risk approach. The Swiss banking sector and Switzerland in general has always been enigmatic, not particularly transparent and, to a certain extent, a law unto itself. The correlation between Credit Suisse and Union Bank of Switzerland (UBS) and the Swiss National Bank meant that, when it came to the crunch, a big name was never going to be allowed to fail. Sure enough, a deal involving UBS was fashioned and today we see business as usual, albeit with some collateral damage for those Credit Suisse shareholders.