PATRICE RASSOU: Cracks appear in global banking landscape

In the banking world, big is beautiful — most of the time. US giants JPMorgan, Citigroup and Wells Fargo bear no scars from the regional banking crisis in March. With depositors fleeing from mid-sized banks, the US banks considered “too big to fail” benefited from huge deposit inflows without paying rate premiums. 

US regionals banks crisis 

Silicon Valley Bank (SVB) is the second-largest bank to collapse since Washington Mutual during the global financial crisis of 2008. It had $209bn in assets, two-thirds the size of Washington Mutual, and banked half the venture capital firms in the US.

In September 2008, Washington Mutual had $15bn of deposit outflows in 12 days. But in an era of internet banking we witnessed SVB losing $42bn of deposits in one day (March 9).

The cause of SVB’s collapse is multifaceted. First and foremost was poor risk management. The bank did not even having a head of risk in place. The asset side of the balance sheet was also peculiar, with 40% of assets held in volatile marketable securities (government bonds and mortgage-backed securities). And on the liability side, only 5% of deposits were sticky retail deposits, which would be covered by federal deposit insurance (with a threshold of $250,000). 

The present crisis has roots in regulatory missteps dating from the Trump era. In 2018, the Dodd-Frank Act, which stringently regulated US banks with more than $50bn in assets, was rolled back by the US Congress. After that,  only banks with more than $250bn in assets had to comply. This set the scene for today’s turmoil. 

Bank failures are relatively common in the US. This may come as a surprise to SA investors given the level of concentration in our banking market. The US has more than 4,000 regional banks, which makes mergers & acquisitions and failures far more common. Since the global financial crisis the number of banks has been shrinking by 16 a month on average, and there have been at least two bank failures a month. 

Not too big to fail 

Global financial giant Credit Suisse also released its annual report in March, noting that material weaknesses were found in the bank. Soon after, the chair of Saudi National Bank, a top shareholder of Credit Suisse, was quoted as saying that it would not provide financial support for Credit Suisse if it decided it had to raise capital. Credit Suisse promptly went into free fall, with the share price falling 24% in a day and the market cap shrinking to the size of Nedbank, the smallest of our “big five” commercial banks.   

The Credit Suisse sell-off forced the Swiss National Bank to inject Sf50bn into the bank. The contagion effect from the US regional banks crisis and the severe sell-off of Credit Suisse affected banks around the world, with the scars from the global financial crisis a not-so-distant memory.

Credit Suisse has in fact been in trouble for a while. It was fined in the US for selling toxic securities before the global financial crisis. In 2021, it lost $5bn when the family office Archegos Capital Management defaulted. In 2022, the new management team promised to review its risk management culture and consider restructuring the business by separating its investment bank from its traditional wealth management business to stem losses.

Credit Suisse issued shares to raise new capital, bringing in the Saudi National Bank as its largest shareholder. But this did not help restore confidence. Clients withdrew about Sf138bn (R2.8-trillion) in deposits. With $556bn of assets, Credit Suisse was more than double the size of SVB and its collapse would constitute a systemic risk to the European banking system.  

So towards the end of March the Swiss authorities forced UBS, another Swiss giant, to acquire its 166-year-old rival for $3.3bn, a 70% discount on an already beaten-down market valuation. Investors lost about $17bn. Given its importance, it is likely that the Swiss National Bank and the European Central Bank will continue to lend financial support. Credit Suisse may have been big but it was definitely not beautiful. 

Are SA banks safe? 

The SA banking system is far more consolidated than most others, with the big five banks dominating the landscape. The asset side of the balance sheet of our banks does not have an overconcentration of securities that may have to be marked down, as was the case with the US banks.

On the funding side, our banks have a healthy split between wholesale and retail funding. Deposit bases have been growing steadily over the past year, unlike the huge outflow of deposits from Credit Suisse, which led to a deterioration in its liquidity coverage ratio from 192% to 144% at the end of 2022.

In addition, exchange controls create a protective layer whereby there is only minimal leakage from our banking system. After delivering a record R110bn in profit in 2022, an increase of 16%, our big five banks are in a strong financial position to weather any global storms. 

• Rassou is chief investment officer at Ashburton Investments.