What has caused the current volatility in markets?

Towards the end of last week we saw a significant rise in risk across global markets, which was set off by concerns regarding exposure to Silicon Valley Bank (SVB) spanning across deposits and debt. This resulted in a sharp fall in the share price of SVB (over 60% on Thursday 9 March) as the bank stated an increase in expected depositor withdrawals, liquidated assets at a $2bn loss and announced their need for a capital raise to shore up their liquidity.

The US Federal Reserve stepped in over the weekend and stated that they would protect depositors, thereby hoping to contain any spread of risk by avoiding a further run on SVB or any other bank. As investors reassess risks across all their exposures, Credit Suisse came into focus again. The Swiss bank has been in the news over the past few years because of a series of scandals. The latest of which involved the highlighting of “material weaknesses” in its financial reporting which caused its shares to tumble more than 30% after its largest shareholder, Saudi National Bank, ruled out injecting new capital.

What is the link to interest rates?
2022 saw the US Fed raise rates by a staggering 4.25% – one of the quickest and sharpest rises in interest rates in history. As interest rates rose, the market value of bonds fell, and we saw the Bloomberg Global Aggregate Index end the year down 16% in US dollars. Banks have a regulated level of capital that needs to be held relative to their deposits and debt. As the market value of their assets fell, these unrealised losses reduce their capital ratios, increasing the need for potential capital raising.

What is the difference between SVB and Credit Suisse?
SVB is the 16th largest bank in the US. That said, its customer base is highly concentrated in technology and venture capital firms, and it has approximately $150bn of assets. Credit Suisse has over $700bn of assets, and its clients span a much wider range across sectors and is a global business with clients across many regions. In addition, it is a significant player in capital markets across debt instruments, derivatives as well as equity. As a result of its bigger size and wider exposure, any fallout in Credit Suisse could have a significantly larger impact on capital markets as well as much wider counterparty risk.

What is different vs the Global Financial Crisis?
The Global Financial Crisis (GFC) in 2008 was a credit and solvency problem, driven by poor quality credit exposure in many banks that led to an explosion in counterparty risk, generalised deleveraging, funding shortages, and forced capital raising. As a result of the GFC, regulators across the globe have increased the capital requirements for banks, and the industry is therefore in a much stronger position today with better balance sheets. The current risks that banks are facing is a result of market risk, where rising rates have caused capital losses. It is not the result of large exposure to mortgages, sub-prime debt and real estate, but rather as a result of the fall in the value of sovereign bonds. This current volatility is an illustration of the psychology behind market movements where investors grapple with confidence in banks.

What now?
Late on Wednesday 15 March, Credit Suisse announced that it was borrowing CHF50bn (US$54bn) from the Swiss National Bank to boost its liquidity, after the latter said it would provide support. This resulted in banks across the globe pairing back some of their losses (which were driven by worries of the systemic impact of Credit Suisse). Clearly concerns are high when a large bank like Credit Suisse raises liquidity concerns. Yet we have seen a swift response from central bankers which is reassuring. Events such as these tend to develop quickly, and markets price in any news as it happens.

We encourage all investors to maintain their focus on their individual investment goals, rather than reacting to the news in the height of the storm. We recognise that events like these can cause anxiety. However, the old adage of time in the markets as opposed to timing the markets remains true – stay the course.