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Why are banks collapsing? Signature Bank and SVB fail as UBS buys Credit Suisse

The failure of SVB created dented confidence on global stock markets  (Reuters)
The failure of SVB created dented confidence on global stock markets (Reuters)

Two US banks, Silicon Valley Bank (SVB) and Signature Bank, have collapsed this month, and Swiss bank Credit Suisse is being bought by rival UBS.

The aftermath of the SVB collapse sparked heavy losses on London’s stock markets and US banking stocks also fell sharply. However, experts have reassured UK banking customers that our banks are more robust and we are unlikely to see the events of 2008 happen again. Nevertheless, people may be concerned about the banking news coming out of the US and Europe.

So what has gone wrong?

Why are banks collapsing?

After customers withdrew money from SVB, leading it to collapse, Signature Bank customers were spooked and withdrew more than $10 billion in deposits, according to CNBC.

Banks often have big holdings of government bonds, assets that can easily be sold to raise cash when they need to meet their obligations. The value of these bonds has fallen sharply as central banks have lifted interest rates, and there are fewer buyers for bonds as rates rise. That leaves the banks with a lower valuation for them on their balance sheets, stoking worries about how easy it is for them to raise money to pay back depositors and function effectively.

Separately, Credit Suisse, which has been rescued by UBS, was facing a set of problems unrelated to those of the US banks. Over the last year, central banks including the US Federal Reserve and the Bank of England have raised borrowing costs to try to slow inflation. This has affected the value of long-term investments that banks were buying when interest rates were lower, and made it harder for banking customers to borrow money, resulting in more withdrawals.

Why did SVB collapse?

Many tech startups banked with SVB, which was created specifically for digital businesses. But SVB lost nearly a quarter of its funds when it said it needed to raise money, leading to customers withdrawing their money in a panic.

SVB had previously kept its cash in short-term investments but moved into long-term investments after the tech industry boomed. But when central banks began increasing interest rates, the value of SVB’s investments dropped. Some US tech investors advised startups to withdraw their money from the bank – resulting in more than $43 billion (£30 million) being withdrawn.

As a result, HSBC bought the UK arm of SVB.

Why did Credit Suisse fail?

‌Credit Suisse was bought by its rival UBS after facing a number of problems in recent years.

For example, in October the bank agreed to pay a fine of €238 million to settle money-laundering charges, which added to declining customer confidence.

Mark Yallop, the former UK chief executive of UBS, told the BBC that Credit Suisse was “a challenged institution with particular idiosyncratic problems that relate to it specifically [and are] not reflective of broader issues in the banking markets.”

He added: "I think this transaction will definitely stabilise [the bank] and should bring a good degree of confidence back to the banking market more generally."