It has been a turbulent few weeks for the global banking sector. Triggered by the bankruptcy of Silicon Valley Bank (SVB) and the liquidity problems of other US banks, this has now culminated in the takeover of Credit Suisse by UBS.
But how did it come about and what are the implications for wealth management? In this article you will find information.
What happened?
A brief summary of what happened: Sillicon Valley Bank in the U.S. recently ran into liquidity problems as a result of sharp interest rate hikes by the Federal Reserve. The bank’s problem was that it had invested a large part of its customer balances in long-dated U.S. government bonds, which are virtually considered a risk-free investment. However, these investments lost massive value due to the sharp interest rate increases last year, which exacerbated the long maturity of the securities.
In addition, the bank’s customers, which are increasingly young technology companies, increasingly withdrew their customer funds due to the current difficult economic environment. When it then became known that the bank had to sell bond positions at a large loss, a bank run ensued.
In the back of the mind that Credit Suisse already suffered from major problems and outflows of money last year, the events in the US now ensured that CS also saw massive withdrawals of funds, which ultimately led to it having to be taken over by UBS.
Impact on asset management
Here we see another good example of the fact that trust is a fundamental factor in this sector. Since this trust has been shaken among many, we would like to use the current occasion to discuss the possible impact of such a crisis on asset management.
- Custodian Banks: The first point of contact between a crisis, such as that of Credit Suisse, and wealth management would be if the latter were used as a custodian bank. However, asset managers often work with multiple banks, regularly evaluating whether the relevant partner banks are still an appropriate place to hold client assets.
- Securities as special assets: Securities held in custody at a bank that is experiencing financial difficulties are considered to be so-called special assets. This means that these assets may not be used to pay off creditors of the bank. This means that your securities are protected at all times.
- Independence: Asset managers are usually not banks themselves and can act completely independently and therefore do not get into liquidity problems, even if all clients want to withdraw their assets. This also means that the asset manager will change custodian bank as soon as it becomes apparent that the financial situation of the respective partner bank is not good.
- Impact on securities prices: A banking crisis can of course have an impact on securities prices, in the banking sector itself but also outside of it. We have seen this happen in recent weeks, when shares in banks that had nothing to do with the current situation have fallen massively in value. Your asset manager has an eye on current market events at all times and can often better assess how great the danger is for an existing securities portfolio. This makes it easier to distinguish whether it is a short-term reaction of the market or whether there is a need for action because fundamental economic factors have changed.
As you can see, asset managers are not completely immune to crises in the financial sector either. However, they help to better identify risks and act accordingly, minimizing the potential impact. Furthermore, your asset manager will advise you to spread your existing assets in cash across several banks. As in the case of Credit Suisse, we have seen that the actual loss of client assets is very unrealistic.
Now, one might say that this is only the case if the bank is appropriately large. However, smaller banks in particular have a much lower-risk business model than large banks, as they are not active in the high-risk business areas. Some banks also specialize entirely in holding customer assets in custody and facilitating securities trading, which in turn poses little liquidity risk.
While client assets are secured by the UBS takeover, the real losers are Credit Suisse’s investors and the reputation of the Swiss financial center.
Questions? We are here for you!
If you have any questions about this topic or would like to learn more about how we work with our client assets, we are always available to help. Simply get in touch with us.
