Recent international news about bank failures and near-failures might seem strange as here in Australasia the news had been more about the record profits for banks.

There is a connection however: rising interest rates.

Banks typically make more money when interest rates rise, as they charge more to mortgage customers but are less compelled to pass these increases on to the deposit rates that they pay.

Different for the mid-sized banks in America

Two mid-size US banks, Silicon Valley Bank and Signature Bank have both gone bust in the past week.

Silicon Valley Bank took advantage of President Trump’s removal of key regulations for mid-sized banks, and invested client money in bonds – in order to make a better return than they would have from the international money markets. When interest rates started to rise, these investments fell in value.

Most of their customers were Tech firms who are having a tough time right now. Withdrawals increased substantially, meaning that the bank had to sell their bonds at a loss in order to meet the withdrawal requests.

This led to the bank having to report these losses and its value falling. This led to concern among customers that the bank was in trouble and so withdrawals increased. A vicious circle ensued.

This has let to stock market investors across America and Europe, dumping banking stocks for fear that more banks may also run into trouble.

Focus particularly fell on Signature bank, as it had done well from its foray into the Crypto market -with deposits from there ballooning over the past decade. Crypto investments, such as Bitcoin, have had a truly awful year (see my blog from January 2021 which predicted much of this).

As its value fell and withdrawals increased, the regulator took control of the bank in an attempt to prevent a domino effect occurring in more US mid-sized banks.

What about the larger banks?

We are unlikely to see a repeat of the 2008 Global Financial Crisis as big banks are generally now better capitalised. The general view is that they are therefore still pretty safe.

There is one exception however.

The problem with Credit Suisse

Credit Suisse was founded in 1856 and is the world’s 45^th largest bank. To put that in context, Commonwealth Bank is 44^th, ANZ is the 52^nd, NAB the 56^th.

Traditionally focused on investing money for the very wealthy (they manage USD 1.6 Trillion), Credit Suisse also moved into the world of investment banking. For the past twenty years at least, this has not worked out well for them.

When I was in investment banking in the late 1990s, their share price reached a peak of 62 Swiss Francs (CHF) per share. Following a series of disasters such as the Greensill Capital and the Archegos hedge fund, by the end of 2021 the share price was just over CHF 9.

Before last week’s crisis in bank stocks it was at CHF 3 and now shares stand at just over CHF 2.

As with all businesses, this matters because of their debt-to-equity ratio. Do their assets exceed their liabilities: are they solvent?

The recent big fall in the share price tipped Credit Suisse over the edge, requiring a USD 50 Billion cash injection from the Swiss Central Bank. There is speculation however that even this massive assistance may not be sufficient.

So what does that mean for us in New Zealand?

Central banks are acting swiftly to prevent any ripple effect from this – known as “contagion”. If actions such as the Swiss Central Bank’s are seen as insufficient, then further measures will be taken by central banks to shore up confidence in the financial system.

This would almost certainly involve interest rates falling, possibly dramatically.

Should this happen in America and Europe, then the Reserve Bank here would almost certainly follow suit. Otherwise the value of the Kiwi dollar would spike upwards, making our exports very uncompetitive.

So what should I do?

Watch this space, don’t panic.

While there is still (unbelievably) no bank deposit insurance in New Zealand, Australasian banks’ exposure to the likes of Credit Suisse seems to be very low. So as things stand banks down here will probably be fine. Interest rates going down soon would of course be positive for those with mortgages too.

As always I welcome any comments or questions.