The writing was on the wall last week.

Today, it looks to be a done deal.

What's happening with UBS and Credit Suisse?

As you're likely aware, Credit Suisse, formerly Switzerland's second largest bank, suffered serious liquidity issues last week.

The Swiss bank was already on shaky ground when a series of banking collapses in the United States, led by SVB Financial Group (NASDAQ: SIVB), roiled the global banking sector.

Suffering from "significant deposit and net asset outflows", the Credit Suisse share price plunged, and trading was halted.

Now, in a deal backed by the Swiss government and Swiss National Bank in an effort to contain the crisis, UBS will acquire Credit Suisse for an all-stock transaction valued at approximately CHF3 billion (AU$4.8 billion).

Credit Suisse shareholders will get one UBS share for every 22.48 Credit Suisse shares they own, or 0.76 francs per share. That's down a gut-wrenching 99% from where the bank was trading in mid-2007.

The Swiss government has waived the standard requirement to get shareholder approval for the deal to move forward.

Looking ahead

On completion of the deal, expected before the end of the calendar year, the combined entities will manage some US$5 trillion of invested assets.

"This acquisition is attractive for UBS shareholders, but let us be clear, as far as Credit Suisse is concerned, this is an emergency rescue," UBS chairman Colm Kelleher said (quoted by Bloomberg).

UBS plans to do some hefty cost-cutting to ensure the viability of the combined businesses moving forward.

"Let me be very specific on this: UBS intends to downsize Credit Suisse's investment banking business and align it with our conservative risk culture," Kelleher added.

While shareholders will get at least some of their money back, bondholders won't be so lucky, with roughly CHF16 billion of Credit Suisse bonds set to lose all value.

The post UBS to acquire Credit Suisse. Here's what you need to know appeared first on The Motley Fool Australia.

Trouble for a bunch of bankers

Three US bank failures last Friday, followed by Credit Suisse on life support by yesterday, and news overnight that another $50 billion was being guaranteed for yet another US bank, this time First Republic.

(Now, a quick plug: this afternoon, around 4.30pm AEDT, the latest episode of our podcast, Motley Fool Money, comes out. We dedicate the whole episode to the collapse of Silicon Valley Bank, but in the context of the overall system. And not in a boring way! So, if you're keen, make sure you subscribe, now, so the episode drops straight into your feed when it's available!)

But I want to take a slightly different angle, which is to call for much more, and better, regulation for our nation's (and the world's!) banks. It is clear that the regulators – correctly – have decided that they need to backstop a potential bank run at almost any bank, given the catastrophic contagion that would follow, plunging the world into what would likely be a deep and long recession.

I have sympathy for the 'moral hazard' argument, but we're looking for 'least worst' outcomes here, societally-speaking, and that means ensuring confidence in the financial system.

Which means?

Which means if you're essentially going to make the government (and the taxpayer) the last line of defence for almost every bank, you're morally obliged to make sure that defence is very, very rarely needed.

You don't have to be Einstein to know that if there were 5 banks – this week alone! – needing support, the regulations aren't working.

Here's a quick list of what I'd change:

– Back in 1933 the 'Glass Steagall' act in the US separated 'commercial' banking (the borrowing and lending stuff) from 'investment' banking. It was repealed in 1999. It should be re-enacted. And the same distinction should be enacted/retained in all other countries.

– If banks are 'systemically too big to fail' – and they are – their activities should be both curtailed and overseen more significantly. These should be ultra-low-risk entities, whose balance sheets should reflect that fact, and whose regulators should ensure that basic risk management processes are in place and functioning properly. And yes, it'd mean lower returns for shareholders. But that's better than being wiped out… just as SVB shareholders.

– We learned during the GFC that banks were taking silly positions with 'derivatives' – essentially making complex financial bets that, as we know, went very, very badly. Banks' derivatives contracts should be limited to managing the inherent risks of commercial banking – ensuring their lending and borrowing is matched off. If you want to do more than that, give up your banking licence and become a hedge fund.

– And the last one is one that I don't want to be true. But I can't escape it. It's time to break up the largest banks. Globally, but here in Australia, too. Competition itself would be improved, but that's not why (in this case) I think it should happen. We know that no bank can be truly ring-fenced in an inherently interconnected financial world. But the exposure of – and cost of fixing – a bank failure would be meaningfully reduced if the entities themselves were smaller. They'd also be infinitely easier to manage and oversee.

The vested interests will hate every single one of those ideas. Which is a sign that I'm on the right track.

The idealists will hate it because they don't think that's how the world should work. But it does.

We live in a world of picking 'least worst' outcomes, in terms of the impact on the economy and our society. I think my suggestions go part of the way to delivering that.

A tough call for the RBA

What does the RBA do now? Until this week, it had to balance inflation and economic growth on either end of the seesaw. But this week has changed the game. Increasing rates to bring down inflation has also worsened the pressure on potential bank collapses. So now the international calculus is 'inflation versus bank collapses'.

How hard can the world's central banks afford to go to curb inflation, when they risk damaging (freezing up?) the financial system?

And on the other hand, unemployment fell again this week, suggesting the economy is still very strong.

They find themselves in a very tough spot.

Everyone has a view, but the consequences of getting this wrong will be significant.

The other C word

The word of the week, this week, has been Confidence. It's essential for the functioning of the financial system, and it's what regulators have been working overtime to retain and restore.

But I hope all this news has also prompted many people to think about another C-word: Concentration.

How many Australians have 20%, 40% or 60% of their portfolios in the Big 4 banks?

Add in the regionals, and how exposed are some investors to the financial sector, writ-large?

To be clear, I am not expecting any trouble for Australian banks. But then, who expected trouble for US banks at the beginning of last week.

But even without that example, it makes no sense to be over-exposed to any individual sector of the economy, or to have your portfolio so correlated to one specific set of risks.

It is taking an unnecessary risk with your own portfolio.

Maybe use this weekend to ask yourself how diversified your portfolio truly is. And maybe plan to make some changes if the answers are uncomfortable.

Quick takes

Overblown: Growth? Value? The idea that these are discrete categories is silly. And each relies on the other. And then there's one more factor: price. People usually talk about 'themes' to dumb down the market… or because they're trying to sell something.

Underappreciated: The long term. I'm regularly asked 'What should investors do now?'. It suggests that we should do something different today, compared to last week or last month. My answer is usually a version of: The same thing investors should always do: buy shares of a business when the price undervalues the company's long term potential.

Fascinating: The next version of 'ChatGPT' – the artificial intelligence program that's taking the world by storm – was released this week. It apparently made a whole website based on a drawing, and passed, with flying colours, a whole stack of standardised tests. The pace of improvement is astronomical, and it's going to continue.

Where I've been looking: There's a lot of pressure on bank share prices at the moment. Which, as a sometime-contrarian, means I've been looking. ANZ Group Holdings Ltd (ASX: ANZ), with a P/E under 10, could be a bargain, particularly if margins continue to increase. Or not, if they don't, and mortgage defaults rise meaningfully. But it's a tempting idea.

Quote: "People calculate too much and think too little." – Charlie Munger

Fool on!

The post Another day, another bank in trouble appeared first on The Motley Fool Australia.

In afternoon trading, shares in the S&P/ASX 200 Index (ASX: XJO) bank stock are down 0.5%, at $94.96 per share.

That's significantly better than the 1.6% loss posted by the ASX 200 at this same time. CommBank is also outperforming the other big four banks.

In fact, during the lunch hour, the CBA share price rebounded into the green, briefly up as much as 0.8% at $96.15 per share. That was a large improvement from the earlier $93.35 per share, which saw CommBank trading down 1.3%.

So, why the wild ride today?

Why all the volatility?

The CBA share price has been unusually volatile as investors consider the possibility of a looming global banking crisis.

As you're likely aware, last week the 18th biggest bank in the United States, SVB Financial Group (NASDAQ: SIVB), went belly up following a liquidity crunch that saw it unable to meet depositors' withdrawal requests.

Silicon Valley Bank shares plummeted 60% before trading was halted. Depositor funds have been guaranteed by the US government. But the now non-operational bank may well leave its shareholders begging for crumbs.

The news saw the CBA share price and other ASX bank shares take a sharp fall this past Friday.

In an unwelcome development, investors are now learning that the US banking woes have spread to Europe.

In overnight trading, shares in Switzerland-based Credit Suisse Group (SWX: CSGN) tanked by 24% to new all-time lows.

This came after the bank's largest investor, Saudi National Bank said it could not offer additional financial support.

The CBA share price may have enjoyed its midday bounce on fresh news that Credit Suisse is getting strong funding support from the nation's central bank.

"Credit Suisse is taking decisive action to pre-emptively strengthen its liquidity by intending to exercise its option to borrow from the Swiss National Bank (SNB) up to CHF 50 billion," the bank reported.

The AU$81 billion lifeline will be welcomed not just by Credit Suisse shareholders, but by bank investors the world over.

CBA share price snapshot

With today's intraday losses factored in, the CBA share price is down just over 7% in 2023.

The post The CBA share price is on a rollercoaster today. Is Credit Suisse to blame? appeared first on The Motley Fool Australia.

In early afternoon trade, the Santos Ltd (ASX: STO) share price is down 3.7% while Woodside Energy Group Ltd (ASX: WDS) shares have tumbled 5.17%.

Indeed, while the ASX 200 is down a hefty 1.42% at the time of writing, the S&P/ASX 200 Energy Index (ASX: XEJ) has dropped 4.4%.

So, what's going on?

What are investors considering?

ASX 200 oil stocks are being hit with two related but separate concerns that have sent the Brent crude oil price to its lowest level since late 2021. Brent is currently trading for US$73.95 per barrel.

First, investors are broadly skittish as the contagion from the United States banking crisis has spread to Europe.

Last week markets were roiled by the collapse of US-based SVB Financial Group (NASDAQ: SIVB), or Silicon Valley Bank.

This week it's Credit Suisse Group (SWX: CSGN) stoking investor fears. With the bank struggling to access additional funds, the Credit Suisse share price cratered 24% on the SIX Swiss Exchange overnight, reaching new all-time lows.

The prospect of a global banking crisis is sparking fresh recession fears. And a world in recession would demand less oil.

That's the demand side.

The second concern hitting ASX 200 shares today is an oversupply of crude oil. At least in the short term.

According to a monthly report just out from the International Energy Agency (IEA), oil stockpiles are at 18-month highs. That's partly due to Russia managing to actually up its crude production in February, despite international sanctions.

The IEA noted (quoted by Bloomberg):

World oil supply should comfortably exceed demand in the first half of the year. Much of the supply overhang reflects ample Russian barrels racing to re-route to new destinations… Russian oil supply has held up surprisingly well following its invasion of Ukraine … the country is still shipping roughly the same amount of oil to world markets.

Is now the time to buy ASX 200 oil stocks?

With ASX 200 oil stocks now well into the red in 2023, is now the time to buy?

That, of course, hinges on how crude oil prices track over the remainder of the year.

But for investors with a medium-term horizon of at least a year or so, I believe both the Santos and Woodside share prices will trade significantly higher inside the next 12 months than where they're at today.

Of course, there are no guarantees. And both ASX 200 oil stocks may well slide further from their current levels in the short term.

But the outlook for oil demand in the latter half of 2023 remains robust.

Both the Organization of Petroleum Exporting Countries (OPEC) and the IEA believe oil demand from China – the world's number two economy and most populous nation – will increase over the year.

CBA mining and energy analyst Vivek Dhar also believes China will help drive an uptick in global oil demand, along with the world's second most populous nation, India.

Dhar said he expects the current ample supply scenario won't last, which will drive crude oil prices higher in the second half of the year.

"We see deficit risks rising in H2 2023, as global oil supply growth, driven mainly by US, Norway and Brazil, fails to keep up with global oil demand growth," he said.

Dhar forecasts the Brent oil price will increase to $US88 per barrel in the second half of 2023.

That's up 19% from today's oil price.

If that proves accurate, it should offer some strong support for the ASX 200 oil stocks.

The post ASX 200 oil stocks are tanking. Is now the time to buy? appeared first on The Motley Fool Australia.

Here's how the big four bank stocks are tracking during lunch hour on Thursday:

• Australia and New Zealand Banking Group Ltd (ASX: ANZ) shares are down 1.72%
• National Australia Bank Ltd (ASX: NAB) shares are down 0.76%
• The Westpac Banking Corp (ASX: WBC) share price is down 1.43%
• And Commonwealth Bank of Australia (ASX: CBA) shares are even after an earlier plunge

Now, it's not just ASX 200 bank shares under pressure today.

The benchmark index is also down 1.41% at the time of writing, with the S&P/ASX 200 Financials Index (ASX: XFJ) dipping 0.75%.

So, what's going on?

Why are ASX 200 bank shares out of favour today?

Financial shares the world over are catching turbulence as some of their international peers struggle with rapidly rising interest rates following a decade-long era of easy money.

Modest increases in interest rates can improve banks' profitability by increasing their net interest margins.

But rapid rates can see their private and business customers struggle to make loan payments, increasing the level of defaults.

ASX 200 bank shares came under pressure earlier this week in the wake of the collapse of United States-based SVB Financial Group (NASDAQ: SIVB), or Silicon Valley Bank.

As depositors began to fear SVB was facing liquidity issues, the dreaded bank run ensued, and the bank was unable to meet the demand for withdrawals. The government stepped in to assure depositors will be fully covered, but shareholders were left holding the bag.

Shares in the now-defunct bank last traded on 9 March, a day they tanked by a gut-wrenching 60%.

Banking crisis leaps across the pond

In the latest development putting new pressure on ASX 200 bank shares, the contagion from SVB's collapse appears to have spread to Europe.

Investors are now worried about the viability of Credit Suisse Group (SWX: CSGN). Fears were stoked after the Swiss-based bank's largest investor, Saudi National Bank, said regulatory issues prevented it from providing additional funds.

Shares in Credit Suisse plummeted 24% on the SIX Swiss Exchange, hitting new record lows.

Commenting on the development, the head of institutional clients at Banca Ifigest in Milan, Carlo Franchini, said (quoted by Reuters), "Markets are wild. We move from the problems of American banks to those of European banks, first of all Credit Suisse. This is dragging lower the whole banking sector in Europe."

As for what investors in ASX 200 bank shares can expect from the global banking sector over the coming weeks, we'll likely just have to wait and see.

"It's too early to know how widespread the damage is," BlackRock chief executive Laurence Fink said (courtesy of The Australian Financial Review).

"The regulatory response has so far been swift, and decisive actions have helped stave off contagion risks. But markets remain on edge," Fink added.

Indeed!

The post ASX 200 bank shares are deep in the red on Thursday. Here's why appeared first on The Motley Fool Australia.

In afternoon trade the ASX 200 is up 0.6%.

Tech shares are broadly outperforming, as witnessed by the 1.5% gains posted by the S&P/ASX All Technology Index (ASX: XTX), which contains some smaller companies outside of the ASX 200.

Today's strong performance follows a positive day of trading in US markets yesterday (overnight Aussie time). The day saw the S&P 500 Index (SP: .INX) closing up 1.7% and the tech-heavy Nasdaq Composite Index (NASDAQ: .IXIC) gaining 2.1%.

And those gains, in turn, were fuelled by investors increasingly betting that the US Federal Reserve will ease off its hawkish tightening pace sooner than feared.

Why might the Fed ease its tightening policies?

A growing number of analysts believe the Fed, the world's most watched central bank, may take a step back from its rapid rate hike path following last week's collapse of SVB Financial Group (NASDAQ: SIVB).

The logic here is that after ramping up interest rates at a record pace from previously record lows, SVB's collapse is indicative of wider stress amongst financial institutions. And if the Fed wants to avoid pushing other banks over the edge, it may need to hold fire on further rate increases.

As you can with the ASX 200 movements today, any potential easing by the Fed would offer up some healthy tailwinds for further gains.

On the other side of that coin, however, the latest inflation figures out of the US showed an increase in monthly consumer prices.

Data released by the Bureau of Labor Statistics showed February's consumer price index (CPI) increased 0.4% in February and was up 6% over the past full year. That could force the Fed's hand in delivering another big rate hike on 22 March.

So, where does that leave us?

What can ASX 200 investors expect from the Fed next week?

For some greater insight into what ASX 200 investors can expect next Thursday on the heels of the Fed's announcement, we turn to the experts (courtesy of Bloomberg).

Tom Essaye, a former Merrill Lynch trader, said a 0.25% hike still looks to be on the cards while earlier expectations of a 0.50% rate hike are unlikely:

Given the bank troubles, this [inflation] report isn't bad enough to put 50 bps back on the table, but if the Fed wants to maintain credibility on inflation, then this report says they have to hike again next week and not signal they are done.

Wolf von Rotberg, equity strategist at Bank J Safra Sarasin also expects the Fed will have to scale back to a 0.25% increase.

According to von Roberg:

The CPI number is no game changer. After the events last week, a 50bps appeared unlikely going into the data print today and the slightly stronger than expected core inflation print puts speculation of a Fed pause to a rest.

The Fed is on track for another 25bps hike next week. Equities should rebound somewhat as the Fed becomes more predictable for now. But the impact from higher rates on the economy is just starting to be felt and will likely become more and more visible as the year moves on.

Ian Lyngen, rates strategist at BMO Capital Markets is on the fence about whether we'll see a pause or a 0.25% increase.

"Overall, this is an inflation update that, taken as a sole input, would suggest that a 25 bp hike next week is a foregone conclusion," Lyngen said. "Alas, the regional banking stress leaves next week's decision as a wild card until there is greater clarity on the success of limiting the contagion to the rest of the banking sector from SVB/Signature."

Meanwhile, Susannah Streeter, head of money and markets at Hargreaves Lansdown, thinks the SVB collapse could see the Fed take a breather. That would likely see another positive day of trading on the ASX 200.

"Policymakers may still feel forced to press pause on rates, despite evidence the hot inflation is still a risk, unwilling to be blamed for making a bad situation worse," Streeter said.

"While smaller banks remain under pressure, there are concerns that bigger banks could become more risk averse in lending, which could dip the economy into a sharper downturn."

There you have it.

Most likely next Thursday morning ASX 200 investors will find the Fed has raised rates by 0.25%. Very few experts are now forecasting a 0.50% increase, with some expecting the central bank to pause its tightening policies to assess the fallout from SVB.

The post Investing in ASX 200 shares? Here's what to expect from the US Fed next week appeared first on The Motley Fool Australia.

Shares in the S&P/ASX 200 Index (ASX: XJO) bank stock closed yesterday trading for $21.49 each. They are currently changing hands for $21.23 apiece.

Like the other ASX-listed banks, and indeed bank stocks the world over, the Westpac share price has been under selling pressure since Thursday's close.

Investors have been lightening their holdings of financial shares in the wake of last week's collapse of United States-based SVB Financial Group (NASDAQ: SIVB).

With Westpac shares now trading below $22, is the ASX bank 200 bank a buy?

Is the ASX 200 bank stock a buy?

Financial shares may remain under some short-term selling pressure as investors eye other potential global bank collapses.

But this week's retrace in the Westpac share price to $21.23 could well represent a good buying opportunity.

Indeed, Morgans' analysts are bullish on the stock.

"We view WBC as having the greatest potential for return on equity [ROE] improvement amongst the major banks if its business transformation initiatives prove successful," the analysts note.

Morgans said the sources of that ROE improvement include "improved loan origination and processing capability, cost reductions (including from divestments and cost-out), rapid leverage to higher rates environment, and reduced regulatory credit risk intensity of non-home loan book".

The broker has an add rating on Westpac shares with a $25.80 price target. That's almost 21% above the current share price.

Morgans also has high dividend expectations from the big bank. Its analysts forecast a fully franked FY23 dividend of $1.53 per share.

At the current Westpac share price, that works out to a heady yield of 7.2%.

Now, not everyone is equally bullish on Westpac.

CEO of Fat Prophets Angus Geddes has a hold recommendation on the bank's shares.

However, Geddes noted that Westpac could benefit from further Reserve Bank of Australia rate hikes (courtesy of The Bull):

The bank's mortgage portfolio is delivering higher yields from increasing interest rates. The company's total Australian mortgage portfolio marginally grew between September 2022 and December 2022. We expect the bank's net interest margin to benefit from any further increases in interest rates.

Westpac share price snapshot

As you can see in the chart below, with the past days' losses factored in, the Westpac share price is now down 9% in 2023.

The post Is the Westpac share price a buy below $22? appeared first on The Motley Fool Australia.

I guess we knew it couldn't last. The ASX 200 had an absolutely cracking start to 2023 over January and the first part of February. The ASX's flagship index closed out 2022 at 7,038.7 points.

But by early February, the ASX 200 had climbed as high as 7,558 points. That represented a 2023 gain of 7.8%. That's an extraordinary run, considering that is rather close to the average gain ASX 200 shares make in a year, not a month.

Most investors would have been shocked if the Index had continued on that trajectory for the rest of 2023.

Alas, this run seems to have come to a screeching halt over the past few trading days. This dramatic loss of value that we've seen over the past week pulls the ASX 200 back below where it started in 2023.

So all of those healthy gains that we saw over the first month or so of the calendar year have now been wiped out, and then some:

Consider the stubborn nature of the inflation that most economies, including Australia, have been enduring over the past year or so. And consider those rapid-fire interest rate rises we've all witnessed the Reserve Bank of Australia execute every single month for 10 months as well.

Putting these two factors together, it's arguable that investors were due a reality check.

But it has come swiftly and brutally.

Why are ASX 200 shares back to the start of 2023?

The losses investors have seen over the past week or so have clearly been sparked by one event though. That would be the collapse of the US tech-focused bank SVB Financial Group (Silicon Valley Bank). As we've covered extensively here at the Fool, the woes of SVB have set off fears of financial contagion.

These have rattled the markets severely, with most of the ASX 200's losses coming after SVB's woes were made public. ASX banks and tech stocks have been hit hard. As have many others. In fact, the only shares that seem to be benefitting from the current environment are ASX 200 gold stocks.

So until this ruckus with SVB dies down, we can probably expect the extreme volatility we are currently witnessing in the share market to continue. It might be time to put on the proverbial seatbelt.

The post ASX 200 dives 2%, wiping out last of 2023 gains appeared first on The Motley Fool Australia.

Here's how the big four bank stocks are tracking in midday trading on Tuesday:

Australia and New Zealand Banking Group Ltd (ASX: ANZ) shares are down 2.2%.

National Australia Bank Ltd (ASX: NAB) shares are down 2.4%.

The Westpac Banking Corp (ASX: WBC) share price is down 1.8%.

And Commonwealth Bank of Australia (ASX: CBA) shares are down 1.6%.

Today's losses now see all of the big four ASX 200 bank shares down more than 5% since last Thursday's close.

Why are ASX 200 bank shares falling again today?

The reason, as you're likely aware, is investor angst over financial shares following last week's collapse of United States-based SVB Financial Group (NASDAQ: SIVB), or Silicon Valley Bank if you prefer.

I won't rehash all of the details here.

In short, it came down to a good old-fashioned (or bad old-fashioned) run on what was the 18th largest bank in the US. SVB was heavily dependent on its business with tech companies. And fast-rising interest rates over the past year have seen many of those indebted companies scrambling for cash.

As ever more customers began to withdraw money from SVB, and word got out that the bank was suffering a liquidity crisis, the whole business snowballed towards insolvency.

That's resulted in heavy losses over the past three trading days, not just for ASX 200 bank shares, but for banks the world over.

Regional banks in the US have taken a particular bruising. Yesterday (overnight Aussie time) saw shares in First Republic Bank (NYSE: FRC) crater by 62%.

While the US government is guaranteeing that all of SVB's depositors will see their money back, there are no such guarantees for shareholders.

"The thought process is that the government agencies are willing to protect the depositors, but that seems to be it," said RJ Grant, trading manager at KBW (quoted by Bloomberg). "Based on their actions, it signals that they don't care about the equity of these banks."

The post ASX 200 bank shares punished again on US bank fallout appeared first on The Motley Fool Australia.

Suffering a 'bank run', Silicon Valley Bank — listed as SVB Financial Group (NASDAQ: SIVB) — found itself in the hands of regulators at the end of last week. Today, the Federal Reserve has provided reassurance that all depositors will be made whole through a measure to contain the fallout.

So, could a similar event unfold within our own major banks, or are Aussie banks in a better position?

Why liquidity matters

Firstly, the Silicon Valley Bank debacle, at its core, is a liquidity problem.

When depositors want their money back (e.g. withdraw it and move the money elsewhere), the bank needs to be able to fulfill that request.

Most of the time this isn't an issue as few people are looking to withdraw their money at any given moment. This means the bank can lend your money out in the meantime — earning you and the bank a return in doing so.

However, when everyone wants their money at once, that is when issues can arise. The problem is compounded when that money is tied up in illiquid assets.

It is for this reason that regulation exists, requiring banks to have sufficient capital buffers, especially when under the most challenging plausible conditions. Hence, banks must conduct regular 'stress tests' to evaluate whether they can operate under these theoretical conditions.

The regulations are a little different in the US, but they also require all large 'systemically important' banks to abide by strict regulations including minimum liquidity coverage ratio (LCR), net stable funding ratio (NSFR), etc.

Based on the information available, it seems Silicon Valley Bank may have escaped some requirements due to an increase in the threshold of what is classed as systemically important during the Trump administration.

To gain a greater understanding of the Silicon Valley Bank collapse, you can read more here.

How are ASX 200 bank shares placed?

As we now know, banks need liquid funds at the ready if customers withdraw their money. For Silicon Valley Bank, US$26 billion in available-for-sale securities wasn't enough to cover the outflows.

The continued withdrawals nudged the US bank to start selling its 'held-to-maturity' securities. Those securities were bonds that were estimated to be worth US$15 billion less than cost due to rising interest rates, as noted in the tweet below. As a result, the sale meant Silicon Valley Bank was now realising billions in previously unexpected losses.

This may suggest the bank's true LCR was below the traditionally expected 100% (at least in hindsight). In contrast, all major ASX 200 bank shares touted LCRs far above the required 100% level at the end of December 2022, as shown in the table below.

Furthermore, it is believed that Australian banks hold a far smaller portion of their high-quality liquid assets in tradeable securities than other countries. This might also mean a lower risk of accessing funds with unrealised gains.

Where Aussie major banks differ from Silicon Valley Bank

Another point of difference between Silicon Valley Bank and ASX 200 bank shares are their depositors.

The troubled US bank's customers were predominantly tech companies, some of which were burning through cash to fund operations. A disproportional reliance on a single sector meant the bank's deposits were crippled by the tech pain in 2022.

Major Australian banks are aware of this type of risk. Fortunately, ASX 200 bank shares hold deposits with a diversified base of customers. This should, in theory, drastically reduce the risk of a bank run getting underway in the first place.

The post ASX 200 bank shares: Are they better prepared than Silicon Valley Bank? appeared first on The Motley Fool Australia.

But I'll do my best to let you know what we know about Silicon Valley Bank's collapse.

(And for the record, we're publishing it at 9.50am on Monday morning. So it's what we know, right now!)

Here goes:

So, a US bank collapsed over the weekend.

The bank – Silicon Valley Bank – was reportedly the 18th largest bank in the United States.

And the details, it should be said, remain somewhat sketchy.

The general consensus seems to be that SVB managed to mess up in a way similar to what happened to some non-bank lenders in Australia during the GFC.

That's important, because – at least at the moment – it seems the issue is more like what happened in Australia, than what happened in the US, in the GFC.

And there's a world of difference between those two experiences.

But before we get into that, a few things.

First, there is a lot we don't know about what happened to SVB. It's messy and the future is uncertain. Some of what we think we know might turn out to be completely wrong.

Second, the range of 'what might come next' outcomes is very wide. To be sure, some possible outcomes are more likely than others. But there's no hard and fast way to rule things in or out. Because it's not just SVB, but the impact on the system. More on that in a bit.

And last, some disclosures: SVB was a Motley Fool recommendation, some of our staff owned shares (they probably technically still own the shares, but they're very probably worth nothing), and SVB was one of The Motley Fool's banks.

Right… let's get back to it.

The GFC was caused by a few things happening in succession, but the starting point was that banks made terrible loans to people who should never have received them. Those loans were packaged and sold to others as 'assets'. They were, we can say with certainty, (very) low quality assets.

And when the assets were worth less (and often worthless!) you have a problem.

Here in Australia, we had two non-bank lenders that got themselves into a modicum of difficulty – Wizard and Aussie Home Loans. Their loans were cheaper because they made 30 year loans, funded with rolling short term debt facilities (think: 30, 60 or 90 day funding agreements that rolled over each time they fell due).

If you can roll these over (and over and over) for the length of the mortgage you've issued, you're sweet.

And they made money because those short term borrowings were cheaper than the long term mortgages – and the difference was their margin.

If that's already going over your head, here's an example. These aren't the actual numbers, but here's how to think about it:

If you can borrow money at 2% and lend it out at 3%, you make a 1% margin. If you can't roll over that 2% funding, you need to pay it back, immediately, in full. But the money had been used to offer 30 year mortgages… meaning you can't pay back those loans quickly.

And you have a very big problem.

Not with the quality of the loans, like in the US, but a mismatch on your cash flows.

Now, that's a very simplified example of what happened during the GFC. There were more wrinkles, but it suffices for our purposes.

It seems – again, we don't know for sure – that SVB had a similar problem, but rather than being caught out on the availability of funding, like in the GFC, it was rising rates that may have been responsible.

Rising rates (yields) pushes down the value of long term, low-rate bonds. (If you bought a 10-year US Treasury at 2% in the past, no-one is going to buy it off you at face value because they can buy a newer bond at, say, 3% or 3.5%. That means your bonds are worth less.

You can still hold them until maturity and get your money back, but the accountants require you to recognise the current value of the bond… which is less than it used to be.

And that creates a hole. It's an accounting hole, to be fair, but if SVB wanted to – or had to – sell those bonds sooner rather than later, that accounting hole becomes very real.

Now, one more time: those numbers above are illustrative, not SVB's actual numbers. But hopefully you can see why it might have got itself in trouble.

The good news? The loans themselves seem not to be poor quality loans. And matching the assets and liabilities likely wasn't a problem over time.

But in the short term, they had a problem. A big problem.

And here's where things get ugly.

If, as a depositor, you get a sense that maybe, possibly, your bank might be in trouble, you'd yank out your money.

Remember, banks don't hold liquid cash to repay every depositor straight away – they've lent that money to others, who will repay over a number of years.

So the first depositor gets her money back. So does the second. But, at some point, if every depositor wants their money back at the same time, the bank's vaults run dry.

It doesn't mean the money wouldn't have been there, in time – as loans were repaid, the vaults would slowly refill – but the mismatch is the problem.

And depositors know that. So, once they sniff a problem, they all rush for the exits, not wanting to be the one next in line after the bank's vaults are emptied.

Yes, that's a good old-fashioned 'bank run'.

And the reality – and likelihood of a continuation – of that is what seems to have been SVB's death knell.

And that's why the responsible US government entity – the FDIC – stepped in on Friday.

Now, if the loan book turns out to be a high quality one, depositors may get most of their money back (because if the assets and liabilities can be matched, it's only a question of the timing of cash flows, and other banks will likely be able to take over that function).

And, while editing this piece, the US Fed, FDIC and US Treasury announced that all depositors will get all of their money! I mentioned things are moving quickly!

So, that could be where this ends.

Or not.

Maybe the loans aren't as high-quality as they seem? Or maybe panic takes over anyway.

See, the risk is that, having seen SVB's troubles, depositors at other banks get nervous. "What if it happens to my bank?" they might ask.

And if you think that there might be a bank run at your bank, you might try to take your money out first… causing precisely the thing you're worried about.

You can see how panic can spread, right?

Do I think it'll happen? No.

Could it? Yes.

And that's why financial markets are worried.

We know, from the GFC, what financial contagion can look like. It's… not good.

And the antidote to contagious panic is… confidence.

That's exactly what regulators will be trying to instill, through words and deeds (and is why the FDIC took over SVB, and why they made their announcement this morning).

Phew… are you still with me?

Good. That was a long (and necessarily simplistic) explanation. But I think it gets to the heart of the problem, and its potential causes and solutions.

And again, we're working with imperfect information, so don't take it to the, ahem, bank.

But where to from here?

Well, the ASX will open this morning.

Bank shareholders will be a little nervous, worried about what could happen if panic was to spread.

It could dent confidence across the board, too. Financial contagion would have impacts across the economy, not just the banks.

Yes, I have used a lot of conditional language in this piece. Probably more than ever before.

And that's deliberate. I'm not sitting on the fence, but there's a lot we don't know about what's gone down. And no-one knows what the future holds.

So, I'm giving it to you straight.

What I will do, though, is tell you what I'm doing as a result.

Nothing.

Just as I've done during the dozens and dozens of potential panics, downturns, and crashes, over the last two decades.

Here's the thing, though: Some have actually come to pass.

I didn't sell before the GFC. I didn't sell before the COVID crash.

If I had, I could have saved money.

But if I'd also sold before all of the other things that could have gone wrong – but didn't – I would have lost even more by missing out on the long term gains that the market has enjoyed despite those fears.

Now, I could always change my mind as new evidence comes to pass. I doubt it, but it's possible. Signing blank cheque guarantees for any course of action is silly.

It's very, very unlikely, though.

Because the most likely outcome, historically speaking, is that there's no long term damage for Australian investors.

There mightn't even be any short-term damage either.

So, if you have a good long-term track record of guessing which potential crises come to pass, and which don't (hint: if you've forecast 10 of the last 2 market crashes, your track record isn't good), then be my guest to take a punt this time around, too.

Now, if your portfolio is chock full of financial companies, I reckon you've been taking too much risk for a long time, not just in the shadow of the SVB collapse. You really should think about diversifying anyway, and now might be a good time to think about your portfolio.

Not because of this event, per se, but because it's a good reminder that concentration in a single sector is not a good risk management strategy!

Me? I don't own any banks. I'm not selling anything. And I'm not losing any sleep.

I'm trusting in the long term compounding power of a quality diversified portfolio (and the market itself).

Over the long term, that's been a very good strategy.

Fool on!

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