Silicon Valley Bank's crisis was caused by high levels of uninsured deposits and investments in securities, leading to potential bank run.
Credit Suisse's crisis resulted from poor management decisions, risky investments, inadequate risk controls, and exposure to risky parts of the financial services industry.
Deep dives
The Challenges Facing Silicon Valley Bank
Silicon Valley Bank has a unique business model, specialized in the Silicon Valley sector, raising money from and deploying funds largely within that setting. However, it faced challenges due to its high level of uninsured deposits and its choice to invest in a lot of securities. The problem arose when rates rose significantly, causing the value of its securities portfolio to decline. Uninsured depositors became nervous, leading to a potential bank run.
The Crisis at Credit Suisse
Credit Suisse's crisis was fueled by poor management decisions, including risky investments and inadequate risk controls. It experienced a decline in performance and faced counterparty risk due to its important role in financial markets. Although it had high capital adequacy ratios, its downfall was caused by its exposure to risky parts of the financial services industry. The crisis highlighted issues of unmanageable banks and raised questions about the effectiveness of regulations and the size of these institutions.
Implications for the Banking Industry
The banking crises at Silicon Valley Bank and Credit Suisse raise concerns about the profitability and stability of the banking industry. The crises may result in higher costs of capital and credit, impacting the allocation of resources in the economy. The possibility of contractionary effects due to banking crises could ironically help in the fight against inflation. Additionally, the crises bring attention to the need for tighter regulations and the question of whether large banks are too big to manage effectively.
The Impact on Switzerland's National Identity
The banking crises in Switzerland have significant implications for national pride and identity. Switzerland takes pride in its global businesses, and the failures of these large banks impact the country's reputation. The job losses and concerns for the economy evoke a sense of turning point in the nation's history, similar to the impact of other failing industries like Swiss airlines. The crises serve as a symbol of the challenges faced by the country and its ability to manage large financial institutions.
Mihir and Felix think about the current crisis in banking. Why did Silicon Valley Bank fail? Is the demise of Credit Suisse a result of the contagion in the United States? And what’s the future of banking? Will the big banks get even bigger? Even more prone to fail? Would we be better off if all deposits were insured? If banks were kept to a smaller size?
