Welcome back to another edition of Mintos Insight. Our goal is to provide our investors with the most comprehensive and useful information to make well-informed decisions regarding their investments.
This month, we’re taking a look at how major asset classes performed in the first quarter of 2023, and recent events surrounding the collapse of Silicon Valley Bank (SVB) and its far-reaching implications across the financial markets.
SVB’s demise: The largest bank failure since 2008
SVB was once the 16th largest bank in the United States. Given its history of catering to high-risk clients, many tech companies chose SVB as their preferred financial institution to hold their funds. As a result, SVB experienced a significant increase in deposit volumes, solidifying its position as the go-to bank for the tech industry.1
SVB held $117 billion of these deposits as securities, mostly in long-dated US government bonds, which were considered to be safe.2 However, these investments turned out to be a critical mistake, due to a combination of factors. While these bonds were considered safe, they were still vulnerable to interest rate fluctuations and changes in market conditions.
- As a quick refresher, the value of bonds decrease as interest rates rise–they move inversely with yields.
When the United States Federal Reserve started to hike interest rates to combat inflation, SVB’s bond portfolio started to lose significant value. As economic conditions continued to worsen throughout 2022, tech companies were hit particularly hard. This led to many of the bank’s customers withdrawing their deposits.3
This left SVB scrambling, without enough cash on hand, and the bank was forced to sell its bonds at steep losses, which spooked investors. The run on the bank was triggered on 8 March 2023 when SVB declared it would raise $1.75 billion in capital to plug the hole caused by the sale of its loss-making bond portfolio. But once customers became aware of the deep financial problems facing SVB, they began withdrawing their money en masse.4 5
In the event of a bank failure, The Federal Deposit Insurance Corporation’s (FDIC) limit for insured deposits is $250 000. As SVB’s customer base consisted of clients with larger accounts, this limit made the bank run swift.6 7
SVB collapsed just two days after announcing that it would raise capital. This marks the largest banking failure in the US since the global financial crisis of 2008.8
The ripple effects across financial institutions globally
On 12 March 2023, federal regulators closed Signature Bank, a New York-based commercial bank, citing concerns about depositor withdrawals following the collapse of SVB, and the risk of contagion in the banking sector.9
Signature Bank’s collapse followed a tumultuous period for the bank and the banking sector at large. In December 2022, the bank announced its intention to reduce its deposits in the crypto sector by around $8 billion, citing issues in the space. SVB’s closure on 10 March 2023 triggered a run on Signature Bank, leading regulators to take possession of the bank and appoint the FDIC as the receiver.10 11
The cost of Signature Bank’s failure is estimated to be at $2.5 billion – with the banking industry funding its rescue, not taxpayers.12 Signature Bank’s collapse raises many questions about the role of crypto in banking, the concentration of uninsured deposits, and the effectiveness of FDIC insurance and bank oversight.
This is the third-largest bank failure in US history and the second-largest since the 2008 crisis.13 It has prompted concerns about whether some banks were too big to fail and what policy measures should be taken to prevent further failures and bank runs in the future.
Mounting losses lead to downfall of Credit Suisse
The collapse of SVB and Signature Bank drew further attention to Credit Suisse, but the three issues are not connected.
Credit Suisse, one of Switzerland’s largest and most iconic banking institutions, had been rocked by a series of scandals and mounting losses that ultimately led to its downfall.
The bank’s approach towards doing business with high-risk clients resulted in massive losses and reinforced the impression of a bank that lacked control over its affairs. Among the controversies that tarnished its reputation were a conviction for facilitating money laundering by drug dealers, involvement in a corruption case, a spying scandal, and a major data leak of confidential client information to the media.14
As a result, clients headed straight for the door, leading to unprecedented outflows in late 2022, amounting to withdrawals of over 110 billion Swiss francs in the fourth quarter of the year.15
The failure of SVB and the erosion of the banking industry’s bond holdings due to higher interest rates triggered a slump. Credit Suisse stock was down as much as 31% when the chairman of its largest shareholder ruled out investing more in the company.16 The Swiss National Bank offered to lend Credit Suisse as much as 50 billion Swiss francs and buy back up to 3 billion francs of debt, buying Swiss authorities time to find a sustainable solution. Over the following weekend, they brokered a hasty takeover by local rival UBS for around $3.2 billion, less than half its market value when shares closed the previous Friday.17 18
The issues that have rocked SVB, Signature Bank, and Credit Suisse may prompt other banks to lower their risk profiles, issuing fewer loans and making it harder for central banks to raise benchmark rates to control inflation without causing recessions.
- When banks become more risk-averse and issue fewer loans, it can slow down economic growth. If central banks then raise interest rates to control inflation, it can further dampen economic activity, potentially leading to a recession. Therefore, caution among banks can make it harder for central banks to find the right balance between managing inflation and maintaining economic growth.
However, analysts argue that the banking sector is in a much stronger position than it was in 2008.19 Let’s take a look at how the volatility of Q1 2023 has impacted major asset classes.
Traditional asset classes
Bonds
Typically, when we cover the markets in our monthly Insight, we dive into stocks before we look at bonds. Considering the nature of recent world events, we’re taking a look at bonds first.
Following UBS’ takeover of Credit Suisse, $17 billion in additional tier-one (AT1) bonds were rendered worthless, which were held by Credit Suisse’s investors.20
- AT1 bonds, also known as “CoCos”, are a type of debt instrument considered to be part of a bank’s regulatory capital. They are similar to traditional convertible bonds, with a specific strike price that converts the bond into equity or stock. As they are riskier, they tend to have higher yields than other bonds. These bonds act as a cushion for a bank’s capital levels and can be written off, if necessary.
AT1 bonds typically rank higher than shares in a bank’s capital structure, meaning that bondholders are paid before shareholders if the bank faces financial difficulties. However, in Switzerland, the terms of the bonds do not guarantee adherence to this traditional capital structure, leading to the aforementioned heavy losses for bondholders in this scenario.
With the Swiss National Bank stepping in to support Credit Suisse with up to 50 billion francs, other banking regulators in the Euro zone are looking to distance themselves from this decision.21
“In particular, common equity instruments are the first ones to absorb losses, and only after their full use would Additional Tier 1 be required to be written down. This approach has been consistently applied in past cases and will continue to guide the actions of the SRB [Single Resolution Board] and ECB [European Central Bank] banking supervision in crisis interventions,” a statement from the ECB read.22
Bond yields in the Euro zone are rising as the ECB’s rate has stabilized amidst the ongoing crisis.
The 10 Year Government Bond yield in Germany – the benchmark for the Euro zone – is currently at 2.3%. In early March, it reached the highest levels since July 2011 at 2.7%.23 Typically, Italian government bonds are seen as a benchmark for the weaker European economies. The 10 Year Government Bond yield in Italy is hovering around 4.1%, with the gap closing between German and Italian 10-year borrowing to 140 basis points.24
Stocks (equities)
When we last looked at stocks, the outlook was optimistic, with the S&P 500 up 6.2% at the end of January. At the time of publication, the S&P 500 is up 5.5%, with four out of six S&P 500 stocks trading at 52-week highs.25
Tracking a stock’s 52-week high can be a useful indicator of its performance because it provides information about how the market is currently valuing the company’s stock. The 52-week high represents the highest price that a stock has traded at over the past year. When a stock is trading near or above its 52-week high, this can be indicative of bullish sentiment in the market, as investors are optimistic about the stock’s potential for growth.
In January, YTD returns for The STOXX Europe 600 were up 7.01%. As it stands, the index is currently up at 6.54% but overall is down by 47 basis points year-to-date (YTD).26 It’s important to note that the STOXX Europe 600 comprises various sectors, including tech. The decline in this index may have been influenced by the poor performance of this sector, which has been experiencing losses due to the aforementioned volatility.
Despite this, the overall sentiment in European stock markets remains positive, with investors remaining bullish about the potential for economic growth in the coming months. However, the markets are expected to remain volatile as investors navigate the ongoing uncertainties and risks associated with global economic factors.
Real Estate
In our last look at the markets, the FTSE EPRA Nareit Europe was up 8.77% year-to-date, and poised to continue this upward trajectory. As it stands, the FTSE EPRA Nareit is down 9.31%, YTD.27
Alternative asset classes
Cryptocurrencies
As crypto is decentralized and operates independently of any government or central authority, many investors see crypto as a hedge against market volatility and economic uncertainty. When traditional financial markets experience instability, investors may turn to cryptocurrency as a way to diversify their portfolios and reduce risk.
Currently, Bitcoin stands at $28 350, climbing sharply by over 30% in March alone. As the banking crisis dominates global markets, traders turn towards Bitcoin as it is decentralized.28 Ethereum followed a similar trend, gaining around 14% in the past month, and it now sits at $1 806.29
On 29 March, it was announced by blockchain analytics platform, Nansen, that over $2 billion had been withdrawn from Binance, a popular crypto exchange, following enforcement action by US regulators.30 Binance is one of the largest cryptocurrency exchanges in the world, and a significant outflow of funds could have a negative impact on the value of cryptos traded on the exchange. A large-scale withdrawal of funds from Binance could also damage investor confidence in the wider crypto market. This could lead to a sell-off of cryptos across multiple exchanges, which could result in a wider market downturn.
It remains to be seen how crypto will continue to perform in the foreseeable future– especially with the European Commission’s proposed Markets in Crypto-Assets (MiCA), as it would be the first of such regulations addressing concerns about crypto investing.31
Loan investments on Mintos
It has been slightly over a year since the Russian invasion of Ukraine. Despite external limitations from sanctions and payment restrictions due to the ongoing conflict, we have made much progress in recovering investors’ funds from Russian lending companies.
As of 1 March 2023, €10 million in war-affected loans have been repaid by the Russian lending companies, and agreements have been reached with all but one company.
Revo, Ecofinance, Lime Zaim, Creditter, Dozraplati, and Mikro Kapital, are making timely payments or have reached agreements with us.
The average net return in March on Mintos is currently at 2.8%, while the average interest rate hovers at around 13%.
Key takeaways for Mintos investors
- Diversification
More on diversification
- Risk management
More on systematic risks
- Keep informed
More on the latest in investing
- Learn from history
More on our past coverage of the markets
Mintos Activity: March 2023
In March, the total investments on Mintos saw a surge of €90.7 million worth of Notes funded, with interest earned by investors amounting to €4.3 million. This was largely driven by a decrease in pending payments.
The average interest rate for March was 12.6%, resulting in an average net return of 2.83% for the year-to-date. The all-time interest earned by investors on Mintos now stands at €225 million, with the total invested amounting to €8.7 billion.
“While total investments increased, Notes available for investments decreased. The average interest rate also slightly dipped from 13.3% in February to 13.1% for EUR investments. Looking ahead, it is expected that the supply and demand for Notes on Mintos will remain stable, resulting in interest rates fluctuating at around 13%.” – Peteris Mikelsons, Head of Partnerships at Mintos.
If you’d like to read any previous Mintos Insight publications, you can find them in our Mintos Insight library. Or, if you would like to learn more about investing, we recommend exploring the Mintos Investor Academy.
Refer a friend to Mintos, and you can both earn
We’re back with our refer-a-friend program! For a limited time only, invite your friends to join Mintos. When they invest €1000 or more before 31 May 2023, you both earn a €50 bonus. Your friend will also receive a 1% bonus on the average investment in the first 90 days.
Changes to reporting of pending payments
Payments that are in the process of being transferred by the lending company within the regular settlement period or up to 7 days past due are reported on the Pending payments page.
These short-term delays can reasonably happen in the normal business cycle. Payments from lending companies that are more than 7 days past due can be found on the Overdue page.
Disclaimer:
This is a marketing communication and in no way should be viewed as investment research, advice, or recommendation to invest. There is no guarantee to get back the invested amount. Past performance of financial instruments does not guarantee future returns. Investing in financial instruments involves risk; before investing, consider your knowledge, experience, financial situation, and investment objectives.
1 SVB is largest bank failure since 2008 financial crisis, Reuters (Accessed April 2023)
2 Annual Report February 23, 2023, SVB Financial Group (Accessed April 2023)
3 1 Negative and 1 Positive in SVB Financial’s Third-Quarter Earnings, Nasdaq (Accessed April 2023)
4 SVB Financial Group Announces Proposed Offerings of Common Stock and Mandatory Convertible Preferred Stock, SVB Financial Group (Accessed April 2023)
5 SVB collapse was driven by ‘the first Twitter-fueled bank run’, CNN (Accessed April 2023)
6 ibid.
7 Deposit Insurance FAQs, Federal Deposit Insurance Corporation (Accessed April 2023)
8 Silicon Valley Bank collapses after failing to raise capital, CNN (Accessed April 2023)
9 Remarks by Chairman Martin J. Gruenberg on Recent Bank Failures and the Federal Regulatory Response before the Committee on Financial Services, United States House of Representatives, Federal Deposit Insurance Corporation (Accessed April 2023)
10 ibid.
11 Signature Bank (SBNY) to Reduce Crypto Exposure by $8-$10B, Yahoo! Finance (Accessed April 2023)
12 Remarks by Chairman Martin J. Gruenberg on Recent Bank Failures and the Federal Regulatory Response before the Committee on Financial Services, United States House of Representatives, Federal Deposit Insurance Corporation (Accessed April 2023)
13 US experiences biggest bank failures since global financial crisis, Financial Times (Accessed April 2023)
14 Credit Suisse Is No More. What Went Wrong? The Washington Post (Accessed April 2023)
15 What happened at Credit Suisse and how did it reach crisis point? Reuters (Accessed April 2023)
16 Credit Suisse Group AG (CS), Yahoo! Finance (Accessed April 2023)
17 Credit Suisse Group takes decisive action to pre-emptively strengthen liquidity and announces public tender offers for debt securities, Credit Suisse (Accessed April 2023)
18 UBS to acquire Credit Suisse, UBS (Accessed April 2023)
19 Credit Suisse went the way of Bear Stearns in 2008. But this crisis is different, CNN (Accessed April 2023)
20 Credit Suisse says $17 billion debt worthless, angering bondholders, Reuters (Accessed April 2023)
21 Credit Suisse Group takes decisive action to pre-emptively strengthen liquidity and announces public tender offers for debt securities, Credit Suisse (Accessed April 2023)
22 ECB Banking Supervision, SRB and EBA statement on the announcement on 19 March 2023 by Swiss authorities, European Central Bank (Accessed March 2023)
23 Germany 10 Year Government Bond, Wall Street Journal (Accessed March 2023)
24 Italy 10 Year Government Bond, Wall Street Journal (Accessed March 2023)
25 S&P Dow Jones Indices (Accessed March 2023)
26 iShares STOXX Europe 600 UCITS ETF (DE) (Accessed March 2023)
27 FTSE EPRA Nareit Global Real Estate Index Series, FTSE Russell (Accessed April 2023)
28 Bitcoin USD (BTC-USD) Price History & Historical Data, Yahoo Finance (Accessed April 2023)
29 Ethereum USD (ETH-USD) Price, Value, News & History, Yahoo Finance (Accessed April 2023)
30 Investors pull $1.6 billion from Binance after CFTC lawsuit, Reuters (Accessed April 2023)
31 Markets in crypto-assets (MiCA), Think Thank European Parliament (Accessed April 2023)
