How Is the SVB and Credit Suisse Crisis Affecting the US and European Banking Industry?

Following recent efforts by central banks and regulators to alleviate the banking crisis, Franklin Templeton Institute’s Stephen Dover and Lukasz Kalwak discuss their thoughts on the implications and outlook for the banking industries in the United States and Europe.

The repercussions of the Silicon Valley Bank (SVB) collapse continue to put the entire global banking sector under pressure. The US and European bank stock indexes, as measured by the S&P 500 Investment Banking & Brokerage Index and the Europe STOXX 600 Banks Index, dropped 15% and 12%, respectively,1 from March 8, 2023, through March 22, 2023. Central banks and regulators have rushed in to provide liquidity to the banks, with the US Federal Reserve’s (Fed’s) balance sheet expanding by US$297 billion to US$8.64 trillion in the past week, reaching its highest level since November 2022.2

Here are some of the implications of the current crisis to the US and European banking sectors:

US regional banks may face higher operating costs as regulators reevaluate the existing capital/liquidity risk framework. Regulators at the Fed are weighing rules that could bring capital and liquidity thresholds for US banks with between US$100 billion and US$250 billion in assets closer to requirements that the largest banks face. The large banks are subject to Liquidity Coverage Ratio (LCR) rules, which require them to maintain minimum amounts of liquid assets to withstand cash outflows over a 30-day horizon. If similar requirements were imposed on mid-sized banks, they would likely need to replace their long-duration funding sources with more cash and more short-term securities. Shorter-duration liquid assets will most likely reduce banks’ profitability, Net Interest Margins (NIM), when rates start to decline.