[Beginner's Guide to Stock Market] What Is the SVB and CS Crisis That Shook the Market?

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Recently, there was a major event that increased volatility in our stock market.

It was the Silicon Valley Bank (SVB) crisis and the Credit Suisse (CS) bank crisis.

In response, the U.S. Federal Reserve (Fed) considered financial market instability and chose to raise the benchmark interest rate by 0.25%p, a ‘baby step’, instead of a 0.5%p ‘big step’ at once.

The SVB and CS crises even influenced the Fed's decision on interest rate hikes.

Some have referred to it as the ‘Second Lehman Crisis’.

Let's take a closer look at what the SVB and CS crises are all about.

What Are the SVB and CS Crises?

A major U.S. bank has gone bankrupt.

It is the Silicon Valley Bank (SVB). SVB ranked 16th in the U.S. by assets (as of the end of 2022, $209 billion).

SVB is the only listed bank in Silicon Valley, the cradle of American startups, that primarily lends to venture companies.

44% of startups that went public last year received loans from SVB.

It was truly called the ‘lifeline’ of Silicon Valley startups.

However, SVB declared bankruptcy on March 10, just two days after a bank run (massive deposit withdrawals) occurred.

So why did SVB go bankrupt?

While deposits from companies significantly decreased, the number of customers wanting to withdraw deposits increased.

Additionally, the slowdown in growth of startups, SVB’s main clients, was also cited as a factor that increased the demand for withdrawals from SVB.

In other words, the bank run and SVB’s inability to cover the outflow with its assets were identified as the cause of bankruptcy.

The SVB bankruptcy is shocking as it is the second largest since the savings bank Washington Mutual Bank (total assets $307 billion) closed during the 2008 global financial crisis.

[Image source=EPA Yonhap News]

Before the shock of SVB’s bankruptcy could subside, one of Europe’s top investment banks, Credit Suisse (CS), also faced a crisis.

The CS crisis caused a much greater shock to the market than the SVB crisis.

CS, founded in 1856, is the 17th largest bank globally and the second largest in Switzerland, with much higher status in terms of size and history.

It is also considered one of the world’s top 9 investment banks (IB).

However, the crisis at CS was not unexpected.

Over time, due to investment failures, involvement in various money laundering channels, and corruption scandals, CS lost investor trust and experienced major client departures.

For example, in March 2021, CS suffered a $3 billion loss due to the bankruptcy protection filing of the UK financial startup Greensill, and in April of the same year, it recorded losses exceeding $5 billion due to funds being trapped in the Archegos Capital margin call incident involving Korean-American investor Bill Hwang.

As a result, CS’s stock price began to decline, and further bad news, such as being convicted for failing to properly monitor money laundering by drug trafficking organizations, continued, leading to ongoing customer deposit withdrawals.

Facing a management crisis, CS conducted a rights offering in October last year, during which Saudi National Bank (SNB) acquired a 10% stake and became the largest shareholder.

Just when it seemed to catch a breath, CS recorded a net loss in February this year, and SNB announced it would not make additional investments, causing CS’s stock price to plunge 20%.

Amid this crisis, the SVB incident triggered the CS crisis.

A Second Lehman Crisis?

[Image source=Reuters Yonhap News]

With the SVB crisis followed by the CS crisis in quick succession, concerns are growing in financial markets that this could spread into a ‘Second Lehman Crisis’.

Professor Nouriel Roubini of New York University, nicknamed ‘Dr. Doom’ for predicting the global financial crisis at that time, said about this crisis, “The CS crisis will be a ‘Lehman moment’ for Europe and the global market”.

This is interpreted as a warning that the current crisis, with global banks facing consecutive troubles, is very dangerous.

However, some also dismiss the possibility of this crisis spreading to other banks and reject the theory of a Second Lehman Crisis.

Since the 2008 financial crisis, regulators worldwide have required banks to increase liquidity ratios.

Europe’s capital adequacy ratios are much higher compared to the U.S.

The Wall Street Journal evaluated that "Considering liquidity ratios and bond holdings of European banks, they are safer compared to the U.S. banking crisis."

Also, the SVB crisis is assessed differently from the Lehman crisis.

During the Lehman crisis, financial firms recklessly sold derivatives backed by poor real estate to people unable to repay, making recovery difficult, whereas SVB invested in very stable assets like U.S. long-term Treasury bonds, distinguishing it from the Lehman crisis.

Impact of the SVB and CS Crises on Our Stock Market

[Image source=Reuters Yonhap News]

After the SVB bankruptcy, nearly flowed out of the domestic stock market.

This year, foreign investors, who have been major players in the domestic stock market, sold nearly in the KOSPI and KOSDAQ markets.

Especially, financial and banking stocks were hit hard.

Since last year, with global interest rate hikes, foreign investors had been actively buying banking stocks in our market.

After the SVB and CS crises, bank stocks fell one after another, recording an average decline of about 10%.

Another notable point is the increased preference for safe assets due to the SVB and CS crises.

As financial market instability grows, gold, a representative safe asset, is gaining attention.

International gold prices have risen for four consecutive weeks this month.

On the 24th (local time), gold futures closed at $1,983.8 per ounce on the New York Mercantile Exchange.

Domestic gold prices also hit an all-time high, with 1 don (Korean gold unit) of pure gold reaching ?362,000 on the 20th.

[Image source=AP Yonhap News]

History repeats itself.

It is fortunate that recent incidents did not spread like dominoes due to strengthened supervision after the Lehman crisis,

but it is painful that banks still failed in risk management despite experiencing a financial crisis.

Currently, the atmosphere is somewhat calm regarding the SVB and CS crises,

but this is why we revisit the issue once again.

Only by not forgetting the past and learning from failures can our capital market and investors mature further.

Dear Joorini readers,

Have you been intoxicated by the rise of our stock market for a while?

It may seem like pouring cold water, but to survive long as an investor, I urge you to be cautious when everyone is celebrating.

With that, I will end this article.

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This article is from [Joorini Guide], published weekly by Asia Economy. We explain stock-related financial news and difficult economic stories in an easy and friendly way so that stock beginners can understand. By subscribing, you can receive articles for free.

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