INTERVIEW. Bankruptcy of the SVB: “No risk, the savings and deposits of the French are safe”, according to Ulrich Hege

the essential
After the failure of the Silicon Valley Bank and the risk that the crisis will spread to other banks, Ulrich Hege, professor of finance at the Toulouse School of Economics (TSE) deciphers the situation.

Why did Silicon Valley Bank fail?

Silicon Valley Bank (SVB) went bankrupt for the first time because it showed very poor risk management. A bank finances itself in the short term with its customers’ deposits, i.e. with our current accounts. This raised money is then securely placed in US Treasury bills. But the bank made the bad choice, and it is a management error, to place this money in long-term, 10-year government bonds.

Why was it a bad choice?

Because the surge in rates following the decisions of the US central bank to raise them to fight inflation has caused the value of bonds to collapse. New bonds issued by the US Treasury in 2023 are much better remunerated than those issued before the rate hike. Old bonds therefore lose a lot of value. This loss of value on Silicon Valley Bank’s balance sheet caused all of its capital to be written off. However, faced with a bank that finds itself without capital, savers and depositors wonder about the bank’s soundness. Then they run to the counter to collect their money, all together. “We are talking about a “bank run”.

Can what happened to SVB customers happen in France?

For years, in France and in Europe, the authorities have been working to guarantee deposits. Until the 2008 financial crisis, deposits in France were only guaranteed up to €15,000. Since the outbreak of the crisis in September 2008, this ceiling has been raised to €100,000 per customer and per bank across the European Union, which has put an end to any panic. There is no risk in France: customers’ savings and deposits are safe.

Could the collapse of the SVB extend to European or French banks?

The Californian bank fell victim to the interest rate hike. However, this increase affects all banks. The risk is therefore correlated. With the difference that the other banks, especially the European ones, manage their risks better by diversifying their assets more. SVB only held long-term Treasury bills. The other banks shorten the maturity of the bonds to two or three years and take out so-called hedging insurance to protect themselves from the risk of an excessive rise in interest rates. In addition, the European Central Bank raised its key rate by 0.5 points on Thursday. This is proof that he knows European commercial banks’ risk management is serious.

However, the Credit Suisse crisis caused a panic start this week…

As you said, the only uncontrolled risk that exists for European banks is that of panic. Due to bad news or a bad interpretation, a banking institution can be questioned even if its balance sheet is solid. The Swiss National Bank wanted to nip this risk by granting a 50 billion loan to Credit Suisse, which is a systemic bank. It is in the European Top 10: it is too important to disappoint it. We will not renew Lehman Brothers.

Have the measures taken after the 2008 financial crisis paid off?

We can be more serene thanks to the decisions of the regulators, even if we have somewhat overestimated the effectiveness of strengthening the banks’ capital and of closer supervision of the banks. Have we done enough? The crisis of these days also shows a failure in the regulation of the sector. Especially since this crisis is the result of the action of central banks, which have drastically increased their reference rates.

Will these shocks encourage central banks to slow rate hikes?

Yes, I think central banks will slow down their rate hike move. Personally, I was surprised that the European Central Bank raised its key rate by 0.5 points on Thursday. It could have only gone up by a quarter of a percentage point, but the markets have welcomed this increase. The US Federal Reserve will halt its rate hikes much sooner than expected and even start lowering them before the end of 2023.

Will this have an impact on inflation?

The main consequence will be inflation that will last longer than expected. Certainly until 2025-2026.

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