Bank Runs: Sberbank in 2022 and Silicon Valley Bank in 2023
Bank Runs: Sberbank in 2022 and Silicon Valley Bank in 2023
We can learn several lessons from the Sberbank and SVB bank runs, including the critical role of geopolitical events and diversification.
A bank run is an event that occurs when a significant number of bank customers initiate the withdrawal of their deposits at the same time, as fears about the bank's solvency arise, leading to a bank's liquidity crisis, reported Investopedia. In recent years, two notable bank runs have taken place with the difference of a year: one was Sberbank in the European Union in 2022, and another was Silicon Valley Bank (SVB) in the United States in 2023.
So, what happened to the two banks, and what lessons can we learn from this?
Sberbank: Everything you need to know
In 2021, Sberbank, a Russian majority state-owned banking and financial services institution, flourished on the European market under the franchise Sberbank Europe AG. In particular, it had an impressive customer base of 773,500 people, with 187 regional branches and over 3,900 people working across Europe. Moreover, Reuters highlighted that the bank generated a whopping 1.25 trillion roubles ($12.40 billion) in annual net profit for 2021, a remarkable jump of 64% from the previous year.
The success of Sberbank on the European market changed overnight, with the escalating conflict between Ukraine and Russia leading to the war. Forbes reported that the Bank of Russia was "desperately" trying to eliminate a run on Russian banks. However, they had challenges meeting their obligations: "individuals and companies continued to withdraw their deposits from Russian banks." This situation illustrates the case of the bank run, as Russian banks, including Sberbank, faced solvency, leading to the liquidity crisis.
The large outflows of cash from Sberbank and other Russian banks operating under the franchise were so critical that Sberbank had to pull out of the European market in 2022, following the imposition of a significant number of sanctions implemented by the European Union, according to The Guardian. One such sanction was enforced by the European Central Bank (ECB) order to close all European legal entities. Reuters further underlined that the backlash from the Russian invasion sparked Sberbank's run on its deposits.
The situation led to Sberbank closing its properties in the European Union, losing many clients and decreasing its net profit. Forbes concluded that the bank "became illiquid as depositors ran to take their money and counterparties demanded Sberbank pay back all of its liabilities."
In March of 2023, Sberbank's CEO, German Gref, shared that the bank had suffered a nearly 80% plunge in net profits for 2022. Even though the company implemented anti-crisis measures, it did not help Sberbank stay afloat.
Sberbank's story on the European market is a vivid example of how geopolitical events and actions can turn a profitable business into a collapse, affecting other critical economic players. The bank's illiquidity and solvency issues, supported by the large cash outflow, led to its downfall in the European market.
The case of Sberbank in the Czech Republic
Before the Russian invasion of Ukraine, the Czech branch of Sberbank flourished and developed in a positive direction. In early 2022, Reuters noted that "the bank held 85.6 billion crowns ($3.90 billion) in total assets at the end of the third quarter of 2021, less than 1% of the total in the Czech banking sector."
However, the situation took a drastic turn with the outbreak of the war and the high tensions between the Czech and Russian-speaking populations. Eventually, Sberbank had to close down its branches for a short time to provide a haven for its employees. "Our employees are mostly citizens of the Czech Republic, and we have to provide them with increased security protection because they face physical attacks," said Radka Černá, PR Manager at Sberbank CZ.
Nevertheless, hostility towards Russian-owned companies was not the only reason that brought tension within society. Most people did not want to support Putin's regime, among other reasons, and withdrew all funds and deposits from Sberbank. "There was a higher demand for withdrawals," confessed Sberbank. On top of that, the situation was further compounded when the Czech Central Bank decided to start 'using its supervisory tools' to investigate "Russian Sberbank's Czech operations in the wake of Russia's invasion of Ukraine and as the bank temporarily closed branches in the Czech Republic," reported Reuters in 2022.
In April 2022, following the order of the European Central Bank, the Czech National Bank revoked the license of Sberbank CZ due to its inability to meet its obligations to clients since February 25, 2022. This led to the liquidation crisis on May 2, 2022. The closure of Sberbank CZ operations was a significant blow to the bank, and it is clear that the fallout from the war has had a substantial impact on the company's operations.
View a watchlist of bank ETFs at the end of this article.
SVB run: what's the story here?
Silicon Valley Bank, also known as SVB, is a state-chartered commercial bank headquartered in Santa Clara, California. Since 1983, it has become one of the largest banks by deposits, specializing in banking for tech startups, venture-backed technology, and health care. Interestingly, this bank was relatively unknown to people residing in other areas of the United States, even though "SVB was among the top 20 American commercial banks, with $209 billion in total assets at the end of the last year, according to the FDIC."
While the story makes it seem like SVB was hitting all its targets and thriving on the market of startup founders, the reality of the situation became much more pathetic at the beginning of 2023. So, let's take a deep breath and travel to 2019–2022 to discover the factors leading SVB to collapse. According to iNews.co, when SVB's assets tripled, it invested heavily in long-term US government bonds. From an economic point of view, this was not risky, as government bonds are known as safe investment options. Most banks have bonds to diversify their investment portfolio. But the case of SVB appears to be even more complicated, as the bank was caught out by rapidly rising interest rates (the value of a bond goes down when interest rates rise), which coincided with the tech recession, as highlighted on the iNews channel.
This situation provoked SVB to act urgently, so they sold their bonds to cover the shortfall, during which they found a significant loss on such action. The combination of events created tension in society: "As soon as word got out, people tried to drain their accounts, creating a run on the bank." According to The Guardian, SVB might be the first bank run of the social media era. Still, it wasn't the first bank to see its fundamental business rocked by feverish Twitter speculation. Early on Thursday, March 9, 2023, Howard Lerman, the CEO of Yext, tweeted that he was hearing from dozens of founders about what to do at SVB: "It's an all-out bank run."
On top of that, the day before SVB's collapse, its clients tried to withdraw $42 billion, a fifth of its value, noted iNews. Unlike the case of the Russian Sberbank, people did not have to wait hours in a long line to withdraw money. Knowing the case of Sberbank and other similar situations in the past years, the US state regulator stepped in and regulated the problem as they realized many other banks could be affected. The iNews channel concluded that the SVB bank run is ranked as the most significant downfall since the financial recession of 2008.
The ripple effect of the SVB bank run
Even though SVB is based in California, with a significant number of customers in Silicon Valley, it has a ripple effect in Europe, where some of its customers are located. In particular, investors and financial experts were most concerned about SVB's recent developments and their potential consequences for the finance market.
Credit Suisse, one of the major banks in Europe, was impacted by the actions of the SVB, especially regarding the bank run. Since the bank had been struggling for some time, it was recently "acquired by Union Bank of Switzerland for approximately $3.25 billion to avoid further market-shaking turmoil in global banking," stated the Washington Post. While the acquisition details are still being finalized between the two parties, it is still unknown how this event will affect Europe regarding banking and finances.
In other words, the SVB bank run taught us again how the interconnectedness of the global financial system works and how events from various parts of the world could influence each other.
What lessons can we learn from two cases of bank runs?
We can learn several lessons from the Sberbank and SVB bank runs, including the critical role of geopolitical events and diversification, the bank's approach to liquidity and solvency, and the part of crisis management in unexpected situations. First, we must acknowledge that you do not have complete autonomy in controlling events, especially geopolitical ones. The escalating conflict between Ukraine and Russia was an unpleasant surprise that drastically shook the two nations. For instance, the imposition of sanctions from the European side led to the collapse of Sberbank in Europe, provoking economic and financial challenges for the country.
While Sberbank had a great approach to diversification, as Europe was not a primary market for the company, it was heavily reliant on the Russian market, which fell. To eliminate such situations and minimize the afterward risk, businesses should have a plan B or simply don't rely on one market.
Undoubtedly, the cases of Sberbank Europe and SVP demonstrate the importance of liquidity and solvency in the banking system. In particular, they need to know what sequence of measures to undertake in a crisis. Dealing with such metrics effectively will lower the risks and ensure that banks have sufficient capital to meet their obligations. The reputation issue is challenging, as you could ruin everything in one day after building it for decades. Both companies suffered reputational damage due to the response to the crisis measures. It is a complex task to keep your reputation, and in the case of Sberbank, it is irreversible.
Overall, Sberbank and SVB responded to the crisis effectively by implementing the relevant measures to overcome the problem. However, even though crisis management did not work wonders, businesses should do their best to prevent unfortunate sequences of events, such as bank runs.
ETF Watchlist
The following ETFs are either thematic or indexed to the banking sector:
Direxion Daily Financial Bear FAZ 0.00
Direxion Daily Financial Bull FAS 0.00
Direxion Daily Regional Banks Bull DPST 0.00
Evolve European Banks Enhanced Yield $EBNK
Fidelity MSCI Financials Index FNCL 0.00
Financial Select SPDR Fund XLF 0.00
First Trust Community Bank QABA 0.00
First Trust Nasdaq Bank FTXO 0.00
iShares MSCI Emerging Markets UCITS ETF (Acc) $SEMA
iShares MSCI Europe Financials EUFN 0.00
iShares US Regionals Banks IAT 0.00
SPDR S&P Bank KBE 0.00