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Trust and risk: SVB and Credit Suisse

Wadsworth Sykes
Wadsworth Sykes
Global Macro Analyst

We explore the fall-out from the banking crisis provoked by the failures of Credit Suisse and Silicon Valley Bank (SVB) and what this means for the wider industry.


  1. The Fed’s decision to raise interest rates for the second time this year reflects a continued concern about inflationary pressures in the U.S. economy.
  2. Some banks lost deposits and are under immediate pressure for liquidity, even those not currently facing any issues are building cash reserves as they fear panic could spread further.
  3. The recent decline in market capitalisation of select regional banks in the U.S. has resulted in significant value losses of around $140bn for five major regional banks since January 2022, with individuals moving away from bank deposits and towards MMFs due to increased perceived risk and higher interest rates.

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The Federal Reserve implemented a second interest rate hike for the year, as anticipated by the market, with many expecting a 25 basis points increase. However, Fed Chair Jerome Powell emphasised that the central bank is closely monitoring potential risks in financial markets, reflecting increased concern about financial instability following the collapse of SIVB and Credit Suisse.

The Fed’s decision to raise interest rates for the second time this year reflects a continued concern about inflationary pressures in the U.S. economy.

The central bank is closely monitoring inflation data and has indicated that it may implement further rate hikes to curb inflation and maintain price stability.

Discover more about Datastream, Refinitiv’s historical financial database with over 35 million individual instruments or indicators across all major asset classes

Federal Reserve Policy Rate. Credit Suisse and SVB banking crisis analysis

When will the Fed start to cut interest rates?

The fall-out has led forecasters to adjust their outlook their future rates outlook.

According to Reuters Polling data, the mean forecast for the Fed Funds Rate expects rate cuts by the end of 2023.

As the chart below shows, market participants are expecting rates to be cut continuously until the end of 2024, with both the mean and median expectation that the Fed Funds Rate will be around 3.60 percent.

Federal Reserve Interest Rate forecast. Credit Suisse and SVB banking crisis analysis

According to recent data released by the Federal Reserve, banks borrowed a record amount of $117bn each night in the week that ended Wednesday 22 March.

This was up by $32bn from the previous week and exceeded the average of $112bn during the GFC.

Banks also resorted to using a new programme launched earlier this month, known as the bank term funding programme, which allows them to pledge underwater bonds on their books at face value.

Borrowing in that programme rose significantly from $2.4bn in its first week to a daily average of $34.6bn and peaked above $50bn on Wednesday 22 March.

Primary credit loans. Credit Suisse and SVB banking crisis analysis

Banks seek to build resilience

The increased borrowing highlights how failures such as Silicon Valley Bank and Signature Bank have disrupted many U.S. banks’ operations, leading them to turn towards short-term funding sources like those provided by Fed’s discount window facility or Federal Home Loan Bank system to offset flighty deposits.

Although some banks lost deposits and are under immediate pressure for liquidity, even those not currently facing any issues are building cash reserves as they fear panic could spread further.

Traditionally, bankers are hesitant about using discount windows due to the stigma associated with seeking credit through it while raising questions over solvency. However, the Fed would reject insolvent borrowers from availing this credit line facility.

The recent decline in market capitalisation of select regional banks in the U.S. has resulted in significant value losses of around $140bn for five major regional banks since January 2022.

This trend, along with Credit Suisse’s rescue by UBS, highlights the current challenges facing the banking sector.

As a result, market participants are increasingly considering consolidation as a potential solution to enhance banks’ resilience.

Major regional banks in crisis

Flight into money market funds

Furthermore, data from the Investment Company Institute (ICI) suggests that confidence in traditional deposits has been deeply shaken within the United States. For two consecutive weeks, there has been a weekly change of more than $100bn in total assets held by money market funds (MMFs).

Such values suggest that individuals may be moving away from bank deposits and towards MMFs because of increased perceived risk and higher interest rates.

Weekly change in MMF assets

The flight to low-risk MMFs is motivated primarily by an increase in perceived risk as well as higher interest rates.

Of particular note is that MMFs holding U.S. government debt have become highly popular among investors. These funds have seen their asset bases expand significantly since 9 March – growing by $250bn over this period.

Money market total assets

Finally, it should be noted that bond market volatility has risen sharply recently with Merrill Lynch’s Move index reaching its highest level since the Global Financial Crisis – mainly because regional banks across the U.S. were placed under conservatorship during this time.

However, Federal Reserve intervention appears to have marginally reduced volatility levels following concerns regarding potential bank runs on Systemically Important Banks (SIBs).

Bond volatility erupts

The financial health of Deutsche Bank causes jitters in Europe

On Friday 24 March, investors reacted strongly to concerns over the health of global financial systems by triggering a sell-off in Deutsche Bank (DBK) shares.

As one of Europe’s most prominent lenders, this move has significant implications for the international economy.

DBK shares fell by as much as 15 percent and closed down approximately 8 percent for the weekend.

U.S. contagion spreading to Europe?

This downward trend was driven primarily by increased costs associated with insuring against default risk, which was reflected in elevated CDS levels reaching their highest point since 2020.

This development followed closely on the heels of Credit Suisse’s takeover by UBS due to its perceived instability relative to larger banking institutions.

Investors worldwide have become increasingly vigilant about potential vulnerabilities within their portfolios and are actively seeking out stable options amid ongoing market volatility.

Banks five-year credit default swap index

 

Five-year credit default swap

Is consolidation the solution for the banking industry?

In conclusion, the recent decline in market capitalisation of select regional banks in the U.S. and Credit Suisse’s rescue by UBS highlight the challenges facing the banking sector.

The flight from traditional deposits to low-risk MMFs has been driven by increased perceived risk and higher interest rates, with MMFs holding U.S. government debt being highly popular among investors.

While bond market volatility has risen sharply recently due to concerns regarding potential bank runs on Systemically Important Banks (SIBs), Federal Reserve intervention appears to have marginally reduced volatility levels. As a result, consolidation may be an increasingly attractive solution for enhancing banks’ resilience amid these challenging times.

Discover more about Datastream, Refinitiv’s historical financial database with over 35 million individual instruments or indicators across all major asset classes


Faqs

When will the Fed start to cut interest rates?

According to Reuters Polling data, the mean forecast for the Fed Funds Rate expects rate cuts by the end of 2023.