Uncertainties in the European and American financial systems


■ Since March 8, the financial system in Europe and the United States has become unstable, and market risk sentiment has worsened.
■ Although the negative impact of the United States will gradually subside, it is expected that the European market will continue to expand market volatility for the time being.

    In this article, I would like to sort out the instability of the European and American financial systems that have occurred since March 8th. In the United States, Silvergate Bank was forced to liquidate, and two regional banks, Silicon Valley Bank (SVB) and Signature Bank, went bankrupt. In Europe, credit problems at Credit Suisse, the Swiss financial giant, have surfaced. Affected by this, the risk sentiment in the financial market worsened. Specifically, the yield of two-year treasury bonds of major countries other than Japan (the United States, Germany, the United Kingdom, Australia, and Canada) fell sharply. It is expected that major countries will stop raising interest rates by the end of the year, while some countries such as the United States are expected to start cutting interest rates. According to the report at the time of writing this article, it is believed that the background of the bankruptcy of two regional banks in the United States is different from Credit Suisse's credit instability theory, as well as its negative impact on the financial market.
    We speculate that the bankruptcy of these two regional banks in the United States is related to the business models of individual banks. For example, SVB absorbs a large number of corporate deposits and invests them in long-term US treasury bond and US mortgage-backed securities (MBS) to earn profits. However, taking the inverted yield of US two-year and 10-year treasury bonds since July last year as an example, due to short-term financing and long-term investment, financial institutions continue to face a negative interest margin environment, and the expansion of valuation losses is the main factor leading to SVB's bankruptcy. On the other hand, as of March 13, the US Treasury Department, the Federal Reserve, and the Federal Deposit Insurance Corporation (FDIC) jointly launched the Bank Loan Program, bank term funding program (BTFP), which fully protects deposits and evaluates the guaranteed value of US treasury bonds and MBS at "face value" for up to one year, and loans to financial institutions. Unless regional banks in the United States fail in succession, with the rapid response of the authorities, the negative impact of the United States on the financial market is expected to gradually subside.
    The direct cause of the Credit Suisse crisis was triggered by reports that major shareholders refused to undertake additional capital increases, but it is speculated that the background is the expansion of losses after 2021. The company is one of the global systemically important banks (G-SIBs), which is prone to raise concerns about its negative impact on other financial institutions. Therefore, the Swiss Central Bank announced that it would set a loan limit of up to 50 billion Swiss francs (about 370 billion yuan) for the company, indicating a policy to curb the expansion of adverse effects. In the future, while striving for time with the support of the Swiss financial authorities, we will seek to rebuild the company's operations by ensuring new capital increase recipients and selling businesses to other financial institutions. However, the degree of deterioration in risk sentiment in the market is different from the situation of Bank 2 in the United States, and the range of changes in the financial market starting from the European market is expected to continue.