The latest on the Silicon Valley Bank collapse

The experts say America's banks are healthy. There are no solvency problems, former FDIC Chair Sheila Bair told CNN. There is no systemic banking issue, former Treasury Secretary Larry Summers told Wolf Blitzer. Silicon Valley Bank's collapse won't cause a recession, said Mark Zandi, chief economist of Moody's Analytics.

So ... what is causing problems for America's banks? Fear.

Moody's this morning downgraded six regional banks' credit ratings because customers keep withdrawing money from them and transferring deposits to larger banks. The first bank runs of the smartphone era were created by viral social media posts, text chains and instant access to banking apps that exacerbated both widespread concern and rapid customer withdrawals.

But there's good news: The government's plan to intervene in the banking sector worked. No banks failed Monday. Regional bank stocks, after plummeting over the past several days, are bouncing back sharply.

The banking crisis may be over, at least for now. Tech companies that banked with the failed SVB were rescued, escaping what an industry insider called an "extinction-level event."

Now, it's up to the Federal Reserve to keep the banking sector stable. It has been on a yearlong effort to slow the economy to keep inflation in check. Now it faces a no-win situation: Annual inflation is at 6%, triple what the Fed considers to be healthy. But rate hikes got us into this mess in the first place, collapsing the value of banks' government bond holdings.

The moment to panic is over. But the bank sector and the economy remain on a knife's edge.

There are some key differences between the collapse and fallout of Silicon Valley Bank and Signature Bank and what happened in 2008.

For one thing, the 2008 crisis was, in part, worsened by financial institutions holding assets (like mortgage-backed securities) that were difficult to value, making it hard for banks to determine how much they were worth. This time, however, the assets causing trouble for banks (US Treasuries and bonds) are easy to value and sell. That also makes intervention by the federal government much more effective.

And it has taken measures. This time around, the US federal government stepped in early to guarantee customer deposits and restore confidence in the US banking system. 

The Federal Deposit Insurance Corporation (FDIC) insures depositors up to $250,000 and large US banks have the money to weather storms — they're regularly stress-tested by the Federal Reserve to make sure that they can. 

But that doesn't mean there isn't more pain ahead. Smaller banks – like SVB was – aren't put through the same stress-testing larger banks have to go through. And shares of banks, both regional and large, plummeted on Monday. 

"This is bad news for US bank shareholders," wrote BlackRock analysts in a note on Monday. "We see knock-on effects for the economy -- reinforcing our expectation of recession."

Investors are searching for clarity in the wake of Friday's collapse of Silicon Valley Bank — the biggest failure of a US bank since 2008. And as they attempt to predict what comes next — be it wider financial chaos, more government regulation, a pause in rate hikes from the Federal Reserve or something else entirely — they're looking to the past for guidance. 

While the collapse of a top-20 bank easily begets comparisons to the global financial crisis of 2008, analysts are looking all the way back to 1991 — though they may only need to go back to last fall.

Here's how they're thinking about the state of the banking industry and the economy. 

Let's take it to 1991: Analysts are looking at the Savings and Loans crisis of the late 1980s and early 1990s as a better model for how this current crisis may play out. 

Some quick background: S&Ls were like banks, but they specialized in accepting savings deposits and making mortgage loans. In the 1980s, they were deregulated and began making risky investments with depositors' money. Those investments went sour and S&Ls found themselves at a loss just as the Fed was raising interest rates. That meant that many borrowers couldn't afford to pay back their loans.

As a result, many S&Ls failed and the government had to step in to bail them out.

Sound familiar? 

"If anything, this appears to be a typical bank failure like we saw during the Savings & Loan crisis," wrote Jaret Seiberg at TD Cowen. "The only difference is that we are dealing with a bank that focuses on technology rather than on real estate."

Since the S&L crisis, regulators have pushed banks away from short-term investments "for the very reasons that appear to have brought down Silicon Valley Bank," Seiberg said. 

So what can we learn from the crisis? A review of regulation and central bank policy seems certain, wrote Societe Generale's Kit Juckes in a note on Monday.

"If the S&L crisis is a model of what happens next, we are closer to the peak in rates than the market thought," he said, meaning that the Federal Reserve could soon stop hiking interest rates to fight inflation. It's also very possible that the US economy will slip into a mild recession within the next year, he added.

Investors might not have to look so far back to see their own future.

Six months ago an alarm went off in the United Kingdom, when the gilt market (UK government bonds) spun out of control. We may be hearing that same siren across the pond today. 

Back in September, former Prime Minister Liz Truss unveiled a huge package of tax cuts, spending and increased borrowing aimed at getting the economy moving. Markets feared the plan would drive up already persistent inflation, forcing the Bank of England to push interest rates significantly higher. As a result, investors dumped UK government bonds, sending yields on some of that debt soaring at the fastest rate on record. 

The scale of the tumult put enormous pressure on many pension funds by upending an investing strategy that involves the use of derivatives to hedge their bets.

As the price of government bonds crashed, the funds were asked to pony up billions of pounds in collateral. In a scramble for cash, investment managers were forced to sell whatever they could — including, in some cases, more government bonds. That sent yields even higher, sparking another wave of margin calls.

Here's the takeaway: The Bank of England was able to bring things back under control quickly by launching into crisis mode. After working through the night, it stepped into the market the day after the plunge with a pledge to buy up to £65 billion ($73 billion) in bonds if needed. That stopped the bleeding and averted what the central bank later told lawmakers was its worst fear: a "self-reinforcing spiral" and "widespread financial instability."

US authorities are acting in similar ways today.

On Sunday, the Federal Reserve announced a new emergency lending program which would deliver cash to banks facing steep losses because of higher interest rates. Chair Jerome Powell also announced on Monday that the central bank would launch a review into what went wrong at SVB. 

US stock futures rose Tuesday morning as traders looked to find stable ground after days of whiplash-inducing volatility.

Investors celebrated an inflation report that met economists' expectations: February's Consumer Price Index showed the annual inflation rate for February was 6%, down from 6.4% in January; and the monthly rate was 0.4%, down from 0.5% in January.

Shares of regional banks were significantly higher after taking a brutal beating in the wake of the SVB and Signature Bank collapse.

The SPDR S&P Regional Banking ETF was up nearly 8% in early trading after falling 12.3% on Monday, and shares of First Republic bank were about 45% higher after dropping more than 60% yesterday.

Large bank stocks also popped on Tuesday morning. JPMorgan Chase was nearly 2% higher and Citigroup was up 2.9% after falling more than 7% on Monday.

Dow futures were up 200 points, or 0.6% on Tuesday morning.

S&P 500 futures were 0.8% higher.

Nasdaq Composite futures gained 0.6%.

Inflation remains elevated but the temperature is coming down, according to the latest Consumer Price Index.

The closely watched gauge of inflation, released Tuesday morning, showed that annual price increases continued to slow in February. 

CPI measured 6% for the year ended in February, down from January's 6.4% and in line with economists' expectations.

On a monthly basis, prices were up 0.4%, representing a cooldown from the January monthly growth rate of 0.5%. Economists were expecting a gain of 0.4%.

When stripping out volatile energy and food prices, core CPI grew 0.5% on a monthly basis and 5.5% year over year. 

China’s Andon Health, a maker of medical devices, says it has full access to funds parked at Silicon Valley Bank, after the United States government intervened to backstop all the deposits at the failed lender.

The Tianjin-based company, which manufactures consumer health devices and supplied Covid test kits to the US during the pandemic, has cash deposits at SVB worth 5% of its total cash and cash equivalents.

That amounts to approximately 675 million yuan ($98 million), according to calculations based on its most recent earnings report.

“Our deposits at Silicon Valley Bank can be used in full and have not suffered any losses,” the company said in a Tuesday filing to the Shenzhen Stock Exchange.

The collapse of SVB, which courted Chinese start-ups, has caused widespread concern in China, where a string of founders and companies rushed to appease investors by saying their exposure was insignificant or nonexistent. So far, more than a dozen of firms have issued statements trying to pacify investors or clients, saying that their exposure to SVB was limited. Most were biotech companies.

SVB, which worked with nearly half of all venture-backed tech and healthcare companies in the United States before it was taken over by the government, has a Chinese joint venture, which was set up in 2012 and targeted the country’s tech elite. The SPD Silicon Valley Bank, which was owned 50-50 owned by SVB and local partner Shanghai Pudong Development Bank, said Saturday that its operations were “sound.”

As the collapse of Silicon Valley Bank and Signature Bank scared investors and pummeledEuropean banking stocks, Credit Suisse’s share price fell to a new record low Monday, with the stock down 3.7% in morning trade.

Credit Suisse on Tuesday acknowledged “material weakness” in its financial reporting as it scrapped bonuses for top executives in the wake of its worst annual performance since the global financial crisis.

The embattled Swiss bank also said that chairman Axel Lehmann had proposed to “voluntarily waive” a share award worth 1.5 million Swiss francs ($1.6 million) for the 2022/2023 financial year, given the firm’s “poor financial performance.”

Credit Suisse (CSGKF) said in its annual report that it had found “the group’s internal control over financial reporting was not effective” because it failed to adequately identify potential risks to financial statements.

The revelations come just days after the bank delayed the publication of the annual report after an eleventh-hour query from the US Securities and Exchange Commission over cash flow statements for 2019 and 2020.

The board concluded that “this material weakness could result in misstatements of account balances or disclosures that would result in a material misstatement to the annual financial statements of Credit Suisse,” it added. Credit Suisse said it was urgently developing a “remediation plan” to strengthen controls.

Senator Elizabeth Warren is calling on Federal Reserve Chairman Jerome Powell to recuse himself from newly-launched review into the collapse of Silicon Valley Bank.

“Fed Chair Powell’s actions to allow big banks like Silicon Valley Bank to boost their profits by loading up on risk directly contributed to these bank failures,” Warren said in a statement. “For the Fed’s inquiry to have credibility, Powell must publicly and immediately recuse himself from this internal review.”

The Fed announced late Monday it has launched a review into the supervision and regulation of Silicon Valley Bank. That bank failure raises questions about whether regulators – including those at the Fed – provided enough oversight and should have seen this trouble coming.

The review will be led by Michael Barr, the Fed’s vice chair for supervision, and the results will be released by May 1, according to the Fed.

“It’s appropriate for Vice Chair for Supervision Barr to have the independence necessary to do his job,” Warren said.