6 investing lessons from the failures of Credit Suisse and Silicon Valley Bank

The past month has been scary for investors, as several banks panicked and collapsed. This month, US banks Silicon Valley Bank and Signature Bank went under, with Silvergate Bank now out of business. But the biggest savior is the Swiss giant Credit Suisse Group.

Here are six important lessons for investors after this latest banking crisis.

1. Matter of concentration risk (1)

Founded 40 years ago, Silicon Valley Bank (SVB) is a leading lender to US technology companies and venture capital investors. More than half of all leading US tech start-ups banked with SVB.

This strong concentration of clients in a single sector contributed to the elimination of SVB. Exposure to technology companies leaves them highly vulnerable to ‘deposit flight’ as tech-savvy businesses all rush to withdraw their deposits at the same time.

2. Matter of concentration risk (2)

During the 2020/21 tech bubble, SVB’s deposits increased dramatically, rising from $49bn in 2018 to $102bn in 2020, to $189bn in 2021. SVB parked this cash tsunami in a portfolio of US Treasury bonds and mortgage-backed securities worth $91 billion.

When interest rates rise in 2022/23, the value of this bond portfolio falls by $15bn. This severe loss eventually led to the death of the main SVB. Of course, the risk team doesn’t expect rates to rise so far, so quickly. When they do, pain follows.

3. Matter of concentration risk (3)

Credit Suisse also messed with concentration risk. It seeks ultra high net worth (UHNW) clients (those in the top 0.01% of global wealth).

As concerns about Credit Suisse’s solvency grew, these wealthy clients withdrew large sums from the faltering Swiss bank. When tens of billions of dollars fled, the bank was canceled by focusing on one client sector – like SVB.

4. Interest rates are important

As global inflation eases in 2021, interest rates are set to rise in 2022.

Until March 15, 2022, the US Federal funds rate is 0% to 0.25%. Currently at 4.75% to 5%, it was raised again by 0.25 percentage points (pp) yesterday. Meanwhile, the Bank of England’s base rate has jumped from 0.1% to 4.25% today, following a 0.25pp increase yesterday.

As interest rates rise, the value of fixed-interest securities (including government and corporate bonds) falls. Unfortunately, these risky banks hold ultra-low-yielding bonds just like the cycle.

5. Liquidity matters

A liquidity crisis occurs when investors need to raise cash quickly by selling assets, sometimes at a loss.

All four of the above sick banks had liquidity problems as they started selling large portfolios of securities and concentrated on making quick cash. Falling into a liquidity trap is a new mistake that banks’ risk managers can and must avoid.

6. Management matters

Finally, the quality of management is important for all businesses. For at least a decade, Credit Suisse hasn’t been doing well. It has stumbled from one crisis to another, paying billions of dollars in fines. In the past, I have referred to this bank as Debit Suisse and DisCredit Suisse.

Personally, I will learn from this crisis. First, I will continue to diversify my portfolio to avoid concentration risk. Second, I will keep some high-quality, liquid assets for when I need cash quickly. Third, I will avoid all businesses where I do not trust the leader!