-In March 2023, bank failures fell like dominoes in the United States. The sequence of events and the scale of the failures reminded one of the Lehman Brothers collapse in 2008.
Between 10 and 12 March, medium-sized banks Silicon Valley Bank (SVB) and Signature Bank failed and ceased operations. Silvergate Capital, the holding company for Silvergate Bank, also announced retrospectively on 8 March that it was ceasing banking operations and going into voluntary liquidation.
SVB's total assets amounted to approximately JPY 209 billion, or approximately JPY 28 trillion, making it the second-largest US bank failure in history after Washington Mutual's failure in 2008, and the third-largest for Signature Bank. This alone gives an idea of the scale of the problem.
In Europe, the Credit Suisse Group, another major Swiss bank, is in crisis and will be subsequently acquired by USB, another major Swiss bank; on 1 May, First Republic Bank (FRC), based in San Francisco, also collapsed and was sold to JP Morgan Chase & Co. The bank was sold to JP Morgan Chase.
With total assets of USD 229.1 billion, it is the second-largest bank in history, surpassing the previously failed SVB and trailing only Lehman Brothers in 2008. In just two months, so many bankruptcy dominoes have occurred.
--The Japanese are unfamiliar with these financial institutions. What kind of bank was it?
SBV was a bank founded in California in 1983, mainly lending to IT start-ups and VCs investing in start-ups.
About 40% of the US IPOs of IT and healthcare companies funded by VCs in 2022 were so much so that SBV was the bank's counterparty, so you can see how much of its business was dedicated to IT start-ups. Nevertheless, Silicon Valley is a cluster of emerging IT companies, so it is understandable that this would be the strategy.
On the other hand, Signature Bank, which collapsed on 12 March, was founded in 2001 and headquartered in New York. It had 40 branches across the US and was a major transactor with crypto-asset related companies.
The same applies to Silvergate Bank, which began operations in 1988 and was a crypto-asset-focused financial institution, entering the business in the early stages of the boom and holding crypto assets worth USD 2.1 billion as of September 2020.
FRC is a commercial bank and trust company established in 1985, providing wealth management services to high net worth individuals. At one point it had 94 branches in 11 states, including New York, California and Massachusetts.
US inflation remains high
Fed faces difficult nibbles
--All of these banks are of a certain size. Why did they fail? The media reported that US interest rate hikes were a factor.
The Lehman Brothers collapse in 2008 was the result of a sharp increase in the number of people unable to repay their sub-prime mortgages to low-income borrowers, which led to the collapse of Lehman Brothers.
The total debt at the time was a massive USD 600 billion, which triggered a global financial crisis. This is still talked about today as the biggest global recession since the Great Depression of 1929. The dominoes of the current collapse, on the other hand, are deeply linked to US monetary policy.
It all started with the new coronavirus infection that suddenly hit the world in 2020. Governments were forced to respond by suspending travel to and from the country in order to curb the spread of the disease, while in the US, the Federal Reserve implemented a massive monetary easing programme in order to avoid an economic slump.
As a result, policy interest rates were lowered, making it easier for start-ups to raise funds, and deposits at the SVB increased. The large amount of deposits collected was invested in government bonds and mortgage bonds.
However, the US was then hit by historic inflation, and the Fed began raising interest rates in March 2022, followed by gradual policy rate cuts, from 0.25% to between 5.00-5.25% as of May this year. Raising interest rates slows down the movement of funds, and this is the result of aiming for a fall in prices.
However, from the point of view of start-ups that had raised funds at low interest rates, higher borrowing rates only increase the risk of raising funds and repaying loans, which naturally slows down the speed of growth. Share prices will also fall and IPOs will become more difficult. As a result, cash flow became tight and the withdrawal of deposits from SVBs led to a downturn in business.
In addition, as interest rates rose, bond prices fell and SVB, which held a large amount of government bonds, was left with a large unrealised loss. This also put a stop to the business, as customers withdrew their deposits, resulting in a shortage of funds.
The situation with government bonds is similar for Signature Bank, but the bank's main customers are crypto-asset-related companies. The industry experienced widespread credit concerns in November 2022, when FTX Trading, a leading crypto-asset exchange, collapsed.
The financial difficulties caused by the shift of funds from risky assets such as crypto assets to other safe assets due to rising interest rates led to the bankruptcies of Signature Bank and Silvergate Bank, which had specialised in the industry, due to an increase in the number of bankruptcies of related companies.
The FRC has been hit by the aftermath of SVB and Signature Bank.
Amidst a string of such failures, it is estimated that the proportion of unprotected deposits in the bank's balance at the end of 2022 will be approximately 67%, leading to a customer creditors' racket and a sharp fall in the share price, which ultimately led to bankruptcy, despite receiving USD 30 billion in support from 11 financial institutions, including JP Morgan Chase, in mid-February. The company was eventually forced into bankruptcy.
It is said that information about the series of failures spread through social networking services, and depositors began to withdraw their funds, which seems to be a very current phenomenon.
--Because it is on such a large scale, I am wondering if there were any signs of this.
In November 2021, the Fed stated its view that inflation was not temporary. The country's banking index falls, as the market factors in the large unrealised losses on loans held by banks due to continued interest rate hikes. It picks up for a time, but it fell sharply between January and June 2022, so we cannot be sure that there was no forewarning of what was to come.
--Will it expand into a Lehman Brothers-like global financial crisis in the future, aside from the FRC, other banks believe it is limited due to the fact that their business partners were IT start-ups and crypto-asset related companies.
Agreed. This time, the event occurred due to the Corona disaster, and the money-game aspect, such as putting surplus funds into IT start-ups, cannot be denied. The US Treasury has also taken exceptional measures, such as providing full protection for deposits, which are normally only protected up to USD 250 000, and the Fed has also set up a framework to provide funds to financial institutions, with the aim of preventing a chain reaction of bank failures.
Meanwhile, the US continues to suffer from high inflation, forcing the Fed to make difficult decisions.
Is tighter monetary policy a headwind for IT start-ups?
--Rate hikes = tighter monetary policy are a headwind for IT start-ups. In fact, the number of IPOs on NASDAQ fell from 752 in 2021 to 161 in 2022.
With higher borrowing hurdles, lower share prices and fewer IPOs, there are headwinds for IT start-ups. Investors are likely to be tempted to invest in companies with stable share prices and dividend payouts, rather than risky growth companies at times like these.
Above all, it is better to put your money in safe havens such as deposits and government bonds than in equities if you are looking for high yields. Unless US monetary policy shifts from higher to lower interest rates, the growth of IT start-ups and investment in them may slow down.
However, the Nasdaq 100, which is made up of high-tech stocks, has rebounded strongly from previous declines caused by monetary tightening and rising bond rates. Investors should also keep an eye on this kind of information.
On the other hand, crypto assets are showing a contradictory trend to the previous point. Although we mentioned that interest rates have shifted from crypto assets to other assets, the situation has changed since the banking collapse in March, with the price of bitcoin rising from 2.7 million yen (10 March) to 3.63 million yen by mid-May.
The move to buy back crypto assets due to repeated financial instability and the persistent inflation risk of legal tender, particularly the US dollar, may have contributed to this situation. From the perspective of depositors, there may be a sentiment that it is safer to hold some of their assets in crypto assets, rather than leaving all their assets in the bank as cash without being able to dispel the uncertainty.
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--What will happen to big tech companies such as GAFAM in the future?
There has been a wave of layoffs at major US tech companies since last autumn, with approximately 50,000 people laid off at GAFAM (Google=Alphabet, Amazon, Facebook=Meta, Apple and Microsoft) alone and 240,000 at US tech companies as a whole. The trend has not changed this year, with over 100,000 people laid off in January alone.
Although the Corona disaster led to a surge in e-commerce transactions and increased sales and profits for US IT companies, particularly big tech, the same growth is not expected in the after Corona, and the company wants to reduce its overstaffed workforce. In addition, GAFAM already operates globally, but the growth potential of the business itself has slowed and competition has intensified.
However, companies are developing and investing heavily in AI, particularly generative AI as represented by ChatGPT, which should contribute significantly to earnings if they bear fruit.
For example, Microsoft has invested USD 1 billion in OpenAI to develop ChatGPT, Google released Bard, a generative AI, in May, and Amazon and Meta are also making use of AI. These new business seeds are also worth keeping an eye on.
As if to illustrate this, Alphabet's share price rose sharply on 11 May. The company's share price rose by 9% over the two days, thanks to a presentation the day before on the use of AI. Its market capitalisation reached USD 1.48 trillion, while Microsoft's share price has also held up well since 2023, reaching a new high for the year as of mid-May.
In April this year, Apple launched a deposit service with an interest rate of 4.15% for users of the Apple Card credit card in the US. This is more than ten times the average US interest rate of 0.3%, a staggering level.
Apple may want to find a way forward in the financial business, as it is essential for Apple to build a business foundation outside of the iPhone.
GAFAM's growth is expected to continue.
Spillover risks to Japan expected to be limited
One reason is that the ‘quality’ of depositors differs between the US and Japan
--What will happen to Japan in the future?
Newly appointed Bank of Japan Governor Kazuo Ueda has made it clear that monetary easing will continue. An interest rate hike is still some way off, and a similar situation to the US is unlikely. It is reasonable to assume that the risk of spillover to Japan is also limited.
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