When U.S. regulators shut down Silicon Valley Bank (SVB) in mid-March 2023 and took control of its assets, many investors had flashbacks to the 2008 financial crisis. Indeed, SVB—the 16^th largest bank in the United States—was the largest U.S. bank to fail since the start of the Great Recession.

Brought on by “inadequate liquidity and insolvency” after bond holdings tanked due to higher interest rates, the demise of SVB (coupled with the collapse of Signature Bank around the same time) sent shockwaves through the banking industry both at home and abroad.¹

The good news for investors, however, is that while banking stocks may have been battered, the resilience shown by the U.S. banking sector as it has tried to weather the storm shows that lessons from previous crises have been learned and that thanks to swift, decisive action to backstop the industry, the U.S. banking sector remains on solid footing and has avoided some of the banking concerns that have begun to crop up in Europe.

U.S. banking sector shows its resilience in the face of uncertainty

Ironically, the very actions taken to shore up struggling banks demonstrate the overall resilience of the U.S. banking sector, even in the face of a possible crisis.

Throughout the turbulence kicked off by the collapse of SVB, officials were at pains to emphasize that the situation in 2023 was significantly different from the crisis of 2008, with U.S. banks today better capitalized and with easier access to funds to avert a domino effect across the financial industry.²

As evidence, in a deal brokered by U.S. Treasury Secretary Janet Yellen, Federal Reserve Chairman Jerome Powell, and JPMorgan Chase CEO Jamie Dimon (amongst others), a number of major U.S. lenders, including JPMorgan Chase, Citigroup, Bank of America Corp, Wells Fargo, Goldman Sachs, and Morgan Stanley participated in a $30 billion rescue of First Republic Bank.

A regional lender, First Republic’s shares had dropped 70% in less than two weeks after they were caught in the knock-on effects of the sudden collapse of SVB and Signature Bank. This injection followed an initial round of financing secured through JPMorgan that gave First Republic access to $70 billion in emergency funding.³

Yellen credited the “decisive and forceful”⁴ actions taken by these banks for demonstrating that the U.S. banking system remains sound—a sentiment echoed by Fed Chairman Powell,⁵ and the U.S. Treasury’s Financial Stability Oversight Council, who called the banking system “sound and resilient.”⁶

Credit Suisse and the situation in Europe

While the U.S. financial system may be demonstrating its resilience, the status of European banks remains something of an open question.

The head of the European Banking Authority recently said that European lenders remain at risk from “potential pockets of vulnerability” in the banking sector.⁷ These vulnerabilities, which have begun coming to light in the wake of the collapse of SVB and other American lenders, like Signature Bank and First Republic, have already ensnared several European banks.

Germany’s Deutsche Bank, which has seen billions of dollars in losses over the last decade as it weathered scandals, strategy changes, and major restructurings and layoffs, has been on shaky ground in recent days. Germany’s biggest lender, Deutsche Bank’s moves regarding credit default swaps on its junior debt led to a selloff that knocked €1.6 billion off the bank’s value and cut more than €30 billion off an index that tracks European banking stocks.⁸

But the shockwaves caused by the collapse of SVB have hit Switzerland’s historic but troubled Credit Suisse hardest of all.

Within days of SVB’s collapse, Credit Suisse borrowed 50 billion Swiss francs ($54 billion USD) from the Swiss National Bank to shore up liquidity after its primary investor, Saudi National Bank, said it would not give more money to Credit Suisse for regulatory and statutory reasons.⁹

Like Deutsche Bank, Credit Suisse has been hampered in recent years by scandals, the collapse of two major investment funds, high turnover in management, and significant losses. After this bailout by the Swiss government, Credit Suisse was bought by Swiss rival UBS for $3.25 billion USD. UBS announced plans to sell off and downsize parts of Credit Suisse over the next several years.¹⁰

It’s important to note the key difference in the collapse of Credit Suisse versus SVB and other American lenders: as pointed out by Jerome Powell, banking turmoil in the United States remains contained to only a small part of the industry and is mainly regional in nature.¹¹ The risk in Europe is the collapse of major national banks that have been chronically mismanaged. This is where the size and diversity of the American banking sector allows for more resilience than European banks, and is a huge benefit compared to the situation in Europe.

CALL ETF: Investing in U.S. banks for enhanced yield

Looking for better yields from U.S. banks but with less risk?

Evolve’s U.S. banks ETF, the Evolve US Banks Enhanced Yield Fund (CALL ETF) offers investors a way to benefit from the positive fundamentals of the largest U.S. banks, with the added value of a covered call strategy applied on up to 33% of the portfolio. Covered call options have the potential to provide extra income and help hedge long stock positions. It’s your CALL to make.

For more information on CALL ETF, visit our website at https://evolveetfs.com/call/.

For more blogs like this, and for insight on investing and investment products, sign up for our weekly newsletter here.

 

Sources: 

¹ Sherman, N. & Clayton, J., “Silicon Valley Bank: Regulators take over as failure raises fears,” BBC, March 11, 2023; https://www.bbc.com/news/business-64915616

² Schroeder, P., Prentice., C., & Anand, N., “Major US banks inject $30 billion to rescue First Republic Bank,” Reuters, March 16, 2023; https://www.reuters.com/business/finance/credit-suisse-borrow-up-54-bln-it-seeks-calm-investor-fears-2023-03-16/

³ Ibid

⁴ Schroeder, P., Prentice., C., & Anand, N., “Major US banks inject $30 billion to rescue First Republic Bank,” Reuters, March 16, 2023; https://www.reuters.com/business/finance/credit-suisse-borrow-up-54-bln-it-seeks-calm-investor-fears-2023-03-16/

⁵ Zahn, M., “US banking system ‘sound and resilient,’ Fed Chair Jerome Powell says,” ABC News, March 22, 2023; https://abcnews.go.com/Business/us-banking-system-sounds-resilient-fed-chair-jerome/story?id=98049363

⁶ Schneider, H. & Sims, T., “Banking stress puts U.S. and Europe on watch for credit crunch,” Reuters, March 26, 2023; https://www.reuters.com/markets/us/feds-kashkari-banking-stress-brings-us-closer-recession-cbs-2023-03-26/

⁷ Thompson, M. & Horowitz, J., “Europe’s banks are still at risk, regulator warns,” CNN Business, March 27, 2023; https://www.cnn.com/2023/03/27/business/bank-risks-europe/index.html

⁸ Comfort, N. & Arons, S., “A Single Bet on Deutsche Bank’s Credit Default Swaps Is Seen Behind Friday’s Rout,” Bloomberg, March 28, 2023; https://www.bloomberg.com/news/articles/2023-03-28/a-single-bet-on-deutsche-bank-s-cds-is-seen-behind-friday-s-rout

⁹ Turak, N., “Saudi National Bank loses over $1 billion on Credit Suisse investment,” CNBC, March 20, 2023; https://www.cnbc.com/2023/03/20/saudi-national-bank-loses-over-1-billion-on-credit-suisse-investment.html

¹⁰ Reiff, N., “What Happened at Credit Suisse and Why Did It Collapse?,” Investopedia, March 28, 2023; https://www.investopedia.com/what-happened-at-credit-suisse-and-why-did-it-collapse-7369825

¹¹ Zahn, M., “US banking system ‘sound and resilient,’ Fed Chair Jerome Powell says,” ABC News, March 22, 2023; https://abcnews.go.com/Business/us-banking-system-sounds-resilient-fed-chair-jerome/story?id=98049363

The contents of this blog are not to be used or construed as investment advice or as an endorsement or recommendation of any entity or security discussed. These contents are not an offer or solicitation of an offer or a recommendation to buy or sell any securities or financial instrument, nor shall it be deemed to provide investment, tax or accounting advice. The information contained herein is intended for informational purposes only.

Commissions, management fees and expenses all may be associated with exchange traded funds (ETFs) and mutual funds (funds). Please read the prospectus before investing. ETFs and mutual funds are not guaranteed, their values change frequently, and past performance may not be repeated. There are risks involved with investing in ETFs and mutual funds. Please read the prospectus for a complete description of risks relevant to ETFs and mutual funds. Investors may incur customary brokerage commissions in buying or selling ETF and mutual fund units.

Certain statements contained in this blog may constitute forward-looking information within the meaning of Canadian securities laws. Forward-looking information may relate to a future outlook and anticipated distributions, events or results and may include statements regarding future financial performance. In some cases, forward-looking information can be identified by terms such as “may”, “will”, “should”, “expect”, “anticipate”, “believe”, “intend” or other similar expressions concerning matters that are not historical facts. Actual results may vary from such forward-looking information. Evolve Funds undertakes no obligation to update publicly or otherwise revise any forward-looking statement whether as a result of new information, future events or other such factors which affect this information, except as required by law.