Silicon Valley, Signature and Credit Suisse: what do they all share(holder) in common?
In what has been termed "the biggest banking crisis since 2008", both Silicon Valley Bank (SVB) and Signature Bank have collapsed, and Credit Suisse has been rescued. Whether more banks are to follow suit is yet to be seen.
What happened?
For 40 years, SVB (the 16th largest US bank) acted as ally and the go-to bank for the tech industry (and particularly start-ups). As the go-to bank, SVB offered services to high-risk start-ups until 10 March 2023 when it was closed by Californian regulators. SVB did not have the liquidity to fund the deposit withdrawals which were demanded following news of SVB's share price decline (on 9 March alone, withdrawal requests amounted to $42bn) and therefore became the second biggest bank failure in US history (since Washington Mutual in 2008). HSBC subsequently acquired SVB's UK business for £1.
Shortly after, on 12 March 2023, Signature Bank (Signature) (a leader in cryptocurrency lending) became the third biggest bank failure in US history after customers again withdrew their deposits following a share price decline and concerns that Signature could follow in SVB's footsteps.
The Federal Deposit Insurance Corporation (FDIC) and the Federal Reserve stepped in to ensure that all SVB and Signature depositors would have access to and be able to recover their deposits.
It is not only the US' financial system which is threatened, however. Credit Suisse (one of the largest European lenders) has also received a lifeline of $54bn from the Swiss central bank and has now been acquired by competitor UBS for £2.5bn. The issues leading to its demise are not actually linked with those of SVB or Signature. However, concern for the banking sector remains.
What is the impact?
The immediate aftermath of the global banking turmoil is already being felt across the financial markets with: (i) unpredictable share prices, (ii) further banks (such as US First Republic Bank) requiring rescuing by authorities and major financial institutions, and (iii) billions of dollars' worth of investor cash being moved from bank accounts to US money market funds which are backed by US government securities (inflows reached the highest amount since June 2020).
Although the long-term impacts are yet to be seen, there is always a risk of the FDIC bringing claims against former directors and officers (D&Os) or shareholders of publicly traded banks bringing securities class action claims. The latter is already happening. Whilst customers are being provided with comfort that their deposits will be protected, the same cannot be said for shareholders whose investments remain at risk. Securities actions have therefore already been issued against each of SVB, Signature and Credit Suisse and their Executives. These actions were all issued by The Rosen Law Firm and are no doubt the first of many.
Whilst banks are typically resilient, mass withdrawals will always threaten their survival and there are still vulnerabilities within the market (such as rising interest rates, inflation, and issues within the crypto industry) which could lead to other institutions suffering with similar issues. Herein lies the risk of further banks suffering the same fate if investor concern remains and trust is not regained. There is a lot of capacity for change, but it will be months before we see exactly what is going to happen.
Amongst other signs of potential trouble ahead, we expect FI/D&O insurers will be closely following the cost of insuring against bond defaults for their financial institution clients.
Considerations for FI/D&O insurers
Had the FDIC and Federal Reserve not intervened to protect deposits in SVB and Signature, business operations would have been severely disrupted, with the knock-on effect of some businesses unable to make payroll and others potentially even going into insolvency. This action has therefore provided some reprieve to insurers from the perspective of a number of claims which would otherwise likely have been issued. Nonetheless, D&O insurers need to remain wary of the potential implications of the global banking turmoil and, in particular, the potential long-term effects of the same.
The "banking crisis" will undoubtedly impact financial lines cover. FI/D&O insurers will no doubt be reviewing their policies currently in place to understand the extent of cover provided and aggregate exposure in the event of further escalation of the banking crisis. FI/D&O insurers should also carefully consider their portfolio of clients in order to determine whether it comprises other financial institutions which could suffer the same fate as SVB, Signature and Credit Suisse. In addition, FI/D&O insurers should be alive to the prospect that some of their large banking clients may well be involved in future bank bailouts should other banks require saving. This may have the effect of materially impacting the bank's risk profile.
All this would suggest enhanced due diligence and scrutiny by insurers of the liquidity and financial status of their financial institution clients (including the extent to which they could cope with mass withdrawal demands), tech companies and start-ups. Whether this will lead to increasing insurance premiums and/or retentions and/or policy wording amendments remains to be seen as the full impact of the current banking crisis plays out.