The Most Significant Bank Collapse Since 2008 Hits The U.S. Financial System
The moment was shocking when, back in 2008, the world learned that Lehman Brothers went into bankruptcy. At that time, 25,000 employees were working for the bank. Many years and countless new regulations later, we are confronted with a new collapse of the 16th biggest bank in the U.S., the Silicon Valley Bank (SVB). As of 2021, there were about 4,844 insured commercial banks, according to the Federal Deposit Insurance Corporation. On Friday, March 10, SVB collapsed after experiencing a classical bank run. That means approximately 7,000 people are in danger of unemployment, and there are billions of USD that might not be returned to their rightful owners. However, last night Federal regulators said all depositors of Silicon Valley Bank would get their money. They also said a second bank, Signature Bank, was closed, and U.S. regulators took control of the bank, and its depositors will also get their money. The Treasury Department, the FED, and the Federal Deposit Insurance jointly announced on Sunday night. How this will be done is unclear, but with the situation evolving, all eyes will be on it to see how it will pan out.
How did that happen?
Banks must keep a portion of their clients' deposits in case the clients need their money back. However, the assets must not necessarily be held in cash but can be held in other assets such as preferred shares, bonds, gold, etc. Moreover, depending on the security, the degree of safety varies. Accordingly, if the bank holds corporate bonds, it is not counted as 100% equivalent to cash. However, if the bank, for example, has treasury bonds or gold, it counts as riskless and, therefore, equals cash.
Since the banks must not hold 100% of their clients' deposits accessible, an unexpected major outflow of clients' money significantly impacts their equity ratio and can lead to a stress scenario. Such an unexpected outflow led to a situation in which the SVB was forced to sell part of its treasury bills. As mentioned, they are officially considered riskless assets since they are usually held until maturity. However, losses can occur if these must be sold before maturity. If such a loss leads to a shortfall of the legally required equity ratio, the bank has to increase its equity differently, such as through capital stock.
That happened to the SVB in Santa Cruz. Due to an unexpected outflow of clients' deposits, they were forced to sell their Treasury Bonds with a loss of about USD 1.8 billion. Accordingly, SVB's CEO Gregory W. Becker announced a capital increase of USD 2.25 billion to save the bank. However, at that point, clients started to panic, and a bank run was the result leading to the bank's collapse.
Accordingly, the Federal Deposit Insurance Corporation (FDIC) was appointed to take over the bank on Friday, March 10, to protect the clients' money, mainly the protected USD 250,000. For deposits exceeding USD 250,000, a significant part of it will likely be lost. Many start-ups are working with the SVB and have millions of U.S. dollars in their accounts to run their business and pay their employees. Time will tell how much of that money will be left eventually.
How do Swiss and U.S. banks differ?
The structure of banks globally is fairly similar. However, the major differences between U.S. and Swiss Banks are seen in their organization, culture, and social outlooks. Firstly, U.S. banks are more willing to take on risks in efforts to increase profits. Conversely, Swiss banks are focused on stability, reliability, and sustainability, meaning they look to be less risky with their client's wealth and hold a higher percentage of the deposits. This is highly attractive for customers looking for banking services as it helps to lift confidence that the bank will be a solution for them rather than prioritizing the dividends of the shareholders in the short term.
American banks are often driven by the "American risk-taking entrepreneurial spirit," with the focus being on profits in the short term. This "everyone for themselves" culture can be profitable occasionally but is far too risky for the Swiss. This is seen in how the Swiss banks approach their banking practices with holistic, long-term oriented, and client-centric.1 This allows the Swiss banks to be tailored more towards wealth and asset management.
To drive this point home, we can look at the Common equity tier 1 capital ratio requirement from the U.S. and Switzerland. In the U.S., to have CET1 must be at least 4.5% of risk-weighted assets (RWA).2 While in Switzerland, the banks are required to have an RWA ratio of 12.86% and a leverage ratio of 4.5%.3 To be compliant with the requirements, banks are required to have a higher percentage to be compliant.
In general, U.S. banks focus much more on investment banking. In Switzerland, the banks tend to be stronger in the private banking area. Of course, not all banks in the U.S. or Switzerland can be characterized in these exact ways, but overall they seem to follow these two tracts respectively. For the American citizen in the right financial situation, it is why Swiss banks are so attractive for using when it comes to using Swiss banks when moving finances offshore.
You can learn more about the Swiss financial jurisdiction here to learn more about why Switzerland is such a popular banking country for Americans looking to protect their hard-earned wealth: Switzerland as a Financial Jurisdiction
How does WHVP choose its preferred custodian banks?
While there are many considerations to take when selecting a custodian bank, one of the major considerations is how the bank deals with the capital of its clients. To name a few, we look at their ability to work with Americans, their ability to provide tax statements, and their experiences as a bank that handles Americans and understands the needs and desires of Americans using Swiss banks. One of the most important considerations we focus on is the due diligence portion of checking to see what their capital ratio are.
Currently, the average capital ratio of our custodian banks is just above 20% making them not overly leveraged and have strong liquidity as a bank. This is important to us because of the SVB collapse, and we will not work with Banks that are not set up responsibly. The client's needs must come first, and a bank that does not hold enough liquidity is not taking its clients' needs seriously.
The recommendation of a custodian bank to be entrusted by our clients’ with the custody of their assets to be managed by us as a company and with the execution of investment orders shall be made on the basis of the following criteria, weighted according to the characteristics of the customer and the financial instruments concerned:
Best possible total price (cost) - taking into account the total assets maintained by us with the respective bank; Probability of full execution and settlement of the order - taking into account the investment strategy envisaged by the client and the financial instruments to be used; Speed of full execution and settlement; Security of the execution; Extent and nature of the requested services; Quality of customer service.
We find it imperative that our clients get the best from the custodian banks we work with and work with the client to ensure that they know which bank will best fit their needs and situation. In the end, we make the recommendation based on our knowledge of the bank and how it aligns with the individual client’s situation. It allows the client to choose from multiple options and make an informed decision when selecting their custodian bank.
Learn more on the reasons to move assets to Switzerland here: Moving Offshore: A Strategic Decision For Americans
Points to take with you
While many start-ups and venture capitalists relied on the Silicon Valley Bank, they are confronted with uncertainty about how to pay their bills and their employees. This shows how dangerous it is to rely on one bank only. This is the reason why we at WHVP recommend working with different banks and preferably diversifying internationally. Furthermore, it is of the utmost importance to do a thorough due diligence checking, for example, the equity ratio and the Tier 1 level of a bank. Additionally, make sure that the bank is not too heavily leveraged.
If you are unsure about your financial setup and want to learn how you can improve the safety of your rightfully owned wealth, feel free to reach out to us to discuss your individual situation and let us help you to increase the safety of your finances.
*Due to the timeliness of this issue, there are still many uncertainties. Accordingly, the author declines any responsibility for the correctness of the subject.
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Picture from Visual Capitalist https://www.visualcapitalist.com/timeline-shocking-collapse-of-silicon-valley-bank/