After the Silicon Valley Bank collapse and Credit Suisse takeover by UBS, the last few weeks have shown that the impact of higher interest rates, and more broadly, tighter access to liquidity and capital, will be felt across the entire industry.
Market expectations are that major institutions (ie key market players) will not be as heavily impacted:
Governments and market authorities have evidenced that they are monitoring the overall situation and have stepped up to minimise any spill-over effects. This effort includes the creation of specialised programmes designed to provide liquidity to institutions and lessen market turmoil. In the case of Credit Suisse, the $3.25bn takeover by UBS has been supported with additional liquidity from the Swiss National Bank and the Swiss Government.
The biggest risk to the global banking system is one of trust. The fate of SVB and Credit Suisse is largely the result of failed risk management which was amplified by the challenging rates market environment. That said, whilst the interest rate increases of the past 12 months mean the value of the certain bonds that banks may sell to meet customer demands for withdrawals has fallen quite severely, most banks are well capitalised with ample liquidity, making it very unlikely for them to rely upon the firesale of these types bonds to meet customer demands.
In fact, well managed banks are always focussed on effectively balancing the risks of their assets and liabilities. When they fail to do so, the consequences are a loss of trust in the bank leading to large withdrawals and a ‘liquidity’ crunch. This is what happened at Credit Suisse lately. There were large deposit outflows following the loss of confidence of some of its major institutional shareholders.
Fortunately, since the 2008 Global Financial Crisis, banking regulators have enforced strict rules that banks must comply with in order to reduce the liquidity risk.
At the heart of our approach is a strong belief in the power of diversification and robust risk management, which includes counterparty risk. That is why we recommend that our clients invest their cash in Money Market Funds, like most institutional investors do, rather than holding material cash deposits with banks. A cash deposit is attached to a bank’s balance sheet.
This means, in the event of insolvency, any depositor will be in the creditor list of the bank and the likelihood of getting their money back (above the £85k that may be compensated by FSCS per eligible person, per UK-authorised bank) will depend on the outcome of the liquidation process.
A Money Market Fund is an investment and so it is segregated from a bank’s (or custodian’s) balance sheet. The regulations in the UK and Europe require it to be identifiable and so fully recoverable in the event of an institution’s insolvency. Most Money Market Funds also invest across a large number of instruments and issuers.
For example, a Money Market Fund may be diversified in over 200 holdings across short-term loans (sometimes known as ‘commercial papers’), time deposits and short-term treasuries issued by banks, corporates and government entities globally. Most managers of these funds also adhere to a strict selection criteria with regards to the issuers credit quality and solvency quality.
The information and opinions expressed herein are the view of Y TREE Limited and are based on current public information we believe to be reliable but we do not represent that they are accurate or complete and should not be relied upon as such. Any information herein is given in good faith, but is subject to change without notice. No liability is accepted whatsoever by Y TREE Limited, employees and for any direct or consequential loss arising from this document. This document is not for distribution outside the United Kingdom.
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At Y TREE, transparency means making the complex simple. We give you a bird’s-eye-view of your financial life so you can make sense of what it means for you and your family.
We aggregate your data, pulling together all the strands of your financial life to give you an instantly accessible, intuitive and objective view. We carry out analysis that provides insight into your income, expenditure, assets and debts.
We create efficiencies at every level with multiple incremental gains that can compound to significant value over time. Compounding is one of the most powerful forces in the financial world; the earlier you start, the greater the impact.
We advise comprehensively on risk, liquidity, currency, cost and structuring – making continuous adjustments when needed.
At Y TREE, we connect your finances - your income, assets and debts - with the things you value most: your plans for the future, your family and the legacy you want to leave.
We design financial life strategies to meet your ambitions and enable you to navigate changes in lifestyle, health, family, business, economies and markets.
At Y TREE, transparency means making the complex simple. It means having an elevated perspective over your financial life and being able to make sense of what it means for you and your family.
We aggregate your data, pulling together all the strands of your financial life to give you an instantly accessible, intuitive and objective view. We carry out analysis that provides insight into your income, expenditure, assets and debts.
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Sophisticated institutional investors never overlook the power of efficiency. We create efficiencies at every level with multiple incremental gains that can compound to significant value over time. Compounding is one of the most powerful forces in the financial world; the earlier you start, the greater the impact.
When you understand the power of compounding, every basis point counts. We advise comprehensively on risk, liquidity, currency, cost and structuring - making continuous adjustments when needed.
MEET US
We believe that the starting point of any advice should always be what you want to do with your life. At Y TREE, we connect your finances - your income, assets and debts - with the things you value most: your plans for the future, your family and the legacy you want to leave.
We design financial life strategies to meet your ambitions and enable you to navigate changes in lifestyle, health, family, business, economies and markets.
MEET US
At Y TREE, transparency means making the complex simple. It means having an elevated perspective over your financial life and being able to make sense of what it means for you and your family.
We aggregate your data, pulling together all the strands of your financial life to give you an instantly accessible, intuitive and objective view. We carry out analysis that provides insight into your income, expenditure, assets and debts.
Sophisticated institutional investors never overlook the power of efficiency. We create efficiencies at every level with multiple incremental gains that can compound to significant value over time. Compounding is one of the most powerful forces in the financial world; the earlier you start, the greater the impact.
When you understand the power of compounding, every basis point counts. We advise comprehensively on risk, liquidity, currency, cost and structuring - making continuous adjustments when needed.
We believe that the starting point of any advice should always be what you want to do with your life. At Y TREE, we connect your finances - your income, assets and debts - with the things you value most: your plans for the future, your family and the legacy you want to leave.
We design financial life strategies to meet your ambitions and enable you to navigate changes in lifestyle, health, family, business, economies and markets.