Swedish Banks Safe Compared with 2023’s Five Failed Banks

Some of the Swedish banks have displayed several of the vulnerabilities like the five banks – four in the US and one in Switzerland – that collapsed last year but none of them have the same general risk profile and combination of vulnerabilities, Finansinspektionen (fi), Sweden’s Financial Supervisory Authority, said.

The five banks – Switzerland’s Credit Suisse, and the four US banks such as Silicon Valley Bank, Silvergate Bank, Signature Bank and First Republic bank – collapsed in the spring of 2023 sending panic among investors and depositors alike.

Trouble started due to the failure of the mid-sized US bank Silicon Valley Bank on 10 March 2023, two days after smaller bank Silvergate Bank announcing that it would be closing its operations. Two days after Silicon Valley Bank, Signature Bank of New York also failed. The fourth US bank to be affected during the spring was First Republic Bank, which after a more drawn-out proceeding was forced to close on 1 May 2023.

The largest failure was the global systemically important Switzerland’s Credit Suisse, which after intervention by the authorities was taken over by UBS, another large Swiss bank, on 19 March 2023.

Analysis by fi

The Financial Supervisory Authority, which released an analysis entitled “The 2023 Banking Turmoil – Could What Happened in the US and Switzerland Also Happen in Sweden?” on Wednesday, said that the Swedish banks must hold capital to cover their interest rate and concentration risks, and the differences between the carrying amount and the market value of Swedish banks’ bond holdings are small, which prevents the build-up of such vulnerabilities.

In general, a high percentage of the Swedish banks’ deposits are also covered by deposit insurance. It is mainly the major Swedish banks that have a greater part of their deposits uninsured, but on the other hand, they have good profitability and higher resilience.

“Therefore, there is a limited risk that Swedish banks would experience a bank run like the one that occurred in the spring of 2023. The lessons learned from the banking turmoil also indicate that deposit insurance contributes to the prevention of bank runs. However, if a bank is heavily reliant on uninsured deposits, it needs to be well managed and not take undue risks that undermine the confidence of its depositors,” the analysis explained.

Reasons for Banks’ Failure

Analysing the failure of the said five banks, fi said that lack of internal governance and control, deficiencies in the supervision, and several of the banks were not fully subject to the Basel regulations, were among the reasons for their collapse.

The authority said that these conditions together led to the build-up of a number of vulnerabilities: poor profitability, high interest rate risks, unrealised losses on bond holdings in the liquidity reserve, concentration risks in deposits and lending, and a high percentage of deposits that were not covered by a deposit guarantee scheme.

Spurred on by digitalisation, events unfolded very quickly. For example, Silicon Valley Bank, one of the affected US banks, lost 85% of its deposits in only a few days.

The analysis said that the backdrop to the banks’ failure was that the US had tightened its monetary policy due to high inflation. This put pressure on sectors that had relied on good access to credit, such as start-up companies in Silicon Valley.

“Cryptocurrencies were especially hard hit, and the end of 2022 has been dubbed ‘the crypto winter’ when the crypto exchange FTX, among others, went bankrupt. Silvergate Bank, Silicon Valley Bank and Signature Bank of New York were all heavily exposed to the digital sector and cryptocurrencies and quickly experienced liquidity problems when it became apparent that they had significant deficiencies in their governance and risk management.

The governance deficiencies at First Republic Bank were not as severe as at Silicon Valley Bank and Signature Bank of New York, but these three banks shared other key vulnerabilities, namely a high percentage of uninsured deposits and significant interest rate risk.

Credit Suisse, on the other hand, had suffered from weak profitability and repeated scandals for a long time.

There had been a run on the bank already in the autumn of 2022 which undermined confidence in the bank and made it vulnerable to the turmoil that arose on the financial markets after the events in the US, fi said.

Even if First Republic Bank and Credit Suisse already had problems before the turmoil in 2023, it was likely that they failed at this particular moment because of the turmoil that spread from the collapse of the first group of banks, the analysis said.