#Disruption and current financial turmoil

What might have started the most recent turmoil in the financial industry? Silicon Valley Bank (“SVB”) like many other banks, was confronted by “interest rate increases that many central banks are undertaking after the covid-19 pandemic” (Povey, 2023). At SVB, a combination of two bank-specific circumstances formed an unfortunate combination. On the one hand “SVB concentrated its deposit base in one sector, the start-up scene in Silicon Valley” (banking expert 3, 2023). When that sector faced a decline, as a result, many of SVB’s clients began simultaneously withdrawing deposits. On the other hand, management aimed to enhance profit by concentrating its investments on long-term bonds. Interest rates grew higher, decreasing the value of these bonds. Under normal circumstances, these losses end up unrealized, as bonds are held to maturity. However, because the deposit outflows were significant, the bank was required to sell the bonds and realize the losses. SVB thus required significant funds quickly, i.e., had “to raise more cash to compensate realized losses caused by the increasing withdrawal of deposits by investors” (banking expert 3, 2023). As LaCroix (2023) confirms this by stating that “rising interest rates caused the value of its bond investments to decline in value, which in turn generated losses when the bank had to liquidate investments to meet depositor withdrawal demands”. Selling government bonds at a much lower price than initially purchased may have triggered market psychology, in return causing concern among investors. McCabe and Mitchell (2023) argue that “investors have been on high alert for signs of contagion following the rapid collapse of California-based Silicon Valley Bank earlier this month”. This in turn “led to a sell-off in shares of banks around the world”. 

As in the case for Credit Suisse, a ‘liquidity problem occurred’ instead: a nightmare for Credit Suisse had begun. Already before the ‘fall’ of Credit Suisse, the Swiss Banking regulator (FINMA), began their investigation on the back of the announcement of Credit Suisse’s chairman, where he stated that asset outflows are not considered as severe.  

One significant event leading up to the ‘fall’, was the US Banking regulator Securities and Exchange Commission (SEC) calling Credit Suisse before the publication of its annual report was due (Ziady, 2023). As a result of this conversation, Credit Suisse had to postpone the publication and instead, release an according press release, which left a negative sentiment in the market. In addition, the Saudi National Bank, a key stakeholder of Credit Suisse, made its announcement of not further investing in Credit Suisse (Uppal, 2023).  

The market, predominantly investors, generally interpreted this as an additional loss of confidence, ignoring facts around regulatory caps that the Saudi National Bank was facing, i.e., according to the knowledge of our experts, no more than 10% of a single company may be held (banking expert 1, 2023). At this point, the momentum of market psychology took its course: negative headlines and perceptions by the market and investors significantly impacted the dynamics regarding market psychology. 

The panic occurring in the market when losing confidence, may result in bank-runs. So-called market psychology, in which news about the stock market strongly influences the psychology of investors (Tetlock, 2007) is one potential trigger of bank-runs. As Tversky and Kahneman (1974) reason, the decision-making of individuals in uncertain situations is driven by heuristics as well as by cognitive biases. Heuristics is argued by Kahneman (2011) as being a research approach via progressive approximation of situations and problems. Steps are provisional, in which biases are represented as systemic errors, repeating themselves in predictable routines in specific situations. This coincides with Barberis and Thaler’s (2003) argument of behavioral finance focusing on the reflection of financial phenomena through models in which market agents are not always rational in their decision-making. Behavioral finance can be argued as the application of psychology to the discipline of finance (Pompian, 2006). 

The overall tense macroenvironment that the banking sector is currently facing, has been accelerated by the bankruptcies of the SVB, Signature Bank, and various other banks in the US. This spillover to the European market, combined with an already extremely low level of confidence in Credit Suisse, resulted in an overnight challenge for the Credit Suisse. This panic which was created on the back of all events is considered the tipping point for Credit Suisse (banking expert 1, 2023).   

The combination of these factors led to a massive loss in the value of the share price in a single day for Credit Suisse. As in finance the share price is viewed as a proxy for the health of a bank, the drop in price resulted in panic among Credit Suisse’s clients, who in return withdrew their assets. The outflows were so significant, as we understand, contrary to the statement made by the chairman, that there was a true risk of overnight insolvency. This action resulted in fear that the insolvency of the systemically important Credit Suisse would result in a global banking crisis, and therefore trigger the collapse of other banks. Additional pressure from the U.S., Great Britain, and France on Switzerland, its Swiss Confederation, and National Bank, required an immediate reaction. With the severity of time, an immediate solution had to be found over a weekend and be put in place before the Asian stock markets opened on Monday morning, to prevent further banks from being affected (banking expert 1, 2023). Evidently, this solution was the take-over of Credit Suisse by UBS. 

This essay provides a possible explanation of the current financial turmoil, presents our thoughts and opinions via discourse, as well as a possible solution approach. This all serves as a foundation to inspire future research. 

Our desktop research is composed of professional articles and blogs providing an initial overview of the situation. We corroborated the desktop research by expert interviews to identify the context of Credit Suisse’s turmoil. Furthermore, it is an efficient method to gather data. Experts provide practical know-how which can hardly be replicated by other forms of research. Through the interviewing process, data can quickly lead to qualitative results (Bogner et al., 2009, p. 1). Therefore, both together gives an according point of view regarding the turmoil. Because the current situation is timely and delicate, our expert interviewees want to be referenced anonymously. 

We presented the current situation of turmoil with an explanation of the possible effects on Credit Suisse’s challenges, which resulted in the takeover by UBS. We argued about disruption being one aspect of possible root cause and presented a solution approach via the “Showcase s24/7”, i.e., a modular platform and ecosystem business model. 

This situation resulting in turmoil requires a deeper understanding of what happened at its root cause as well as a thorough analysis. We do not claim to know the precise answer, yet, but want to provide food for thought, arguments, and discourse. It is in our interest to understand whether a correlation between disruption and the current turmoil exists and whether the “Showcase s24/7” as a modular business model or an ecosystem, is a valid approach to mitigate risks.  

We summarize this short discourse with Christensen’s argument that “an organization cannot disrupt itself” (2013, p. 198). Sadly, this concludes that dis-integration for forward-integrated incumbents will continuously present a challenge. Why? Because organizations “can only naturally prioritize innovations that promise improved profit margins relative to their current cost structure” (p. 198). And ultimately, the solution found with the takeover of Credit Suisse by UBS, does not resolve the situation completely but rather makes UBS “even bigger than too big to fail” (WirtschaftsWoche, 2023).  

Finally, we ask again, is disruption hitting the banking sector? We have started this discussion based on a set of arguments for potential mechanisms with their derivation and thoughts for a possible solution approach. With this contribution, we would like to foster further research, analysis, and discourse regarding this complex situation.