The banking crisis and copper price development

The banking crisis that has been unfolding in recent weeks has had a ripple effect on many industries, including the copper market. This blog article takes a closer look at Silicon Valley Bank and Credit Suisse, the interest rate and copper price development last week.

A quick rundown of the situation is first. The 16th biggest bank in the US and one well-known lender to start-ups and IT enterprises is Silicon Valley Bank (SVB). The bank's failure was caused by earlier investment choices, such as investing vast sums in US government bonds during the period of low interest rates, which became unprofitable as the Federal Reserve rapidly raised rates to combat inflation.

The "bank run" was triggered when the SVB announced that it had sold a bunch of securities at a loss and would sell $2.25 billion in new shares to plug the hole in its finances, leading to customers withdrawing their money in large numbers. US regulators have guaranteed all SVB customers' deposits, but investors in the company's stock will not be protected. While there are already some signs of stress at other banks, most analysts point out that US and European banks have much stronger financial buffers now than during the global financial crisis.

The recent events surrounding Credit Suisse, a Swiss banking giant, have also caused a stir in global markets. Credit Suisse has struggled with regulatory issues and financial stress, and things took a turn for the worse when the bank announced it had found "material weakness" in its 2021 and 2022 financial reporting process. This included a lack of effective risk assessment to identify misstatements in its financial reporting.

To make matters worse, Credit Suisse's biggest backer, the Saudi National Bank, said it would not buy more shares in the Swiss bank following the announcement. This, coupled with the failure of Silicon Valley Bank and two additional US banks, shocked the investment community. Concerns were voiced that the problem would "spread to banks of a very great magnitude" as a result.

As one of the "globally systemically significant banks," Credit Suisse's demise could set off a broader financial crisis. In order to prevent a possible collapse, the Swiss National Bank intervened and provided Credit Suisse with a loan of up to $54 billion. As a result, there was a significant increase in stock prices. Shares rose as much as 33% before settling at about a 17% gain.

The recent incidents involving SVB and Credit Suisse highlight the importance of robust risk management practices in the banking sector. The failure of Silicon Valley Bank was not caused by rising interest rates; rather, it was the result of inadequate risk management with regard to their investments in US treasury bonds, which had seen a large decline in value over the last year due to rising interest rates.

The European Central Bank (ECB) announced on Thursday March 16th that they raised the interest rate by 0,5%. The decision is part of the ECB's efforts to tackle high inflation across the eurozone. The increase is a sign and indication that the ECB does not think the current events have been so severe that their interest rate plan needs to be changed. Next week on Wednesday the 22th of March the Federal Reserve will announce their interest rate decision. 

Let's take a look at the copper price. Over the last week, copper prices have fallen by around 4%, reaching their lowest level in ten weeks, since the beginning of January. The decline in copper prices can be attributed to a combination of factors, including the banking crisis, concerns about global economic growth, and rising inflation. As investors seek safe havens for their money, they are shifting away from high-risk assets like copper and moving towards more stable investments such as bonds and gold.