How Do Bills and Bonds Work?
In order to understand why the problems occur, we must first understand how bills and bonds work.
Bills and bonds have their own values. These values are calculated for a certain maturity, during which the person promises to hold the relevant bond or bill. Bonds and bills lose their value when a new bill/bond comes out with a higher value than them. However, if the holding investor continues to hold it until the promised maturity, he/she will receive the valuation promised by the bank at the end of the maturity date. If the held bond or bond is desired to be sold early, it can be sold at its new value, taking into account the loss in value. The system of waiting until maturity is called “held to maturity”.
This is exactly the problem underlying the banking crisis experienced in the past months. After the incredible interest rate hikes by the Federal Reserve, the US dollar gained value, while alternative investment instruments, bills and bonds, lost value. Banks have had major problems repaying them as people want to sell their incredibly depreciating bonds and bonds without waiting for maturity.
Among these banks were Silvergate, Sillicon Valley, Signature, First Republic on the American side and Credit Suisse on the European side. Credit Suisse, the largest bank among them, had $1.4 Trillion in assets at the end of 2022. These problems with Credit Suisse put pension funds in great danger. After these problems, news began to spread that Credit Suisse was meeting with large investors to raise capital. The aim of the bank was to raise capital and sell most of its assets to exit the US market.
However, Credit Suisse with a history of 167 years, which could not find the necessary capital, declared bankruptcy on March 19 and was sold to UBS.
Charles Schwab bank, which has the same problems, manages $ 7.13 trillion in assets. With 33.8 million active investment accounts, 2.4 million retirement accounts, and 1.7 million banking accounts, the bank is the 10th largest bank in America.
The CEO of the bank, Walt Bettinger, announced in an interview on March 15 that they were not looking for capital, but in line with the news spread, it was shared that the bank was considering borrowing $ 2.5 billion on May 19. It is stated that he intends to obtain this debt by issuing and selling a bond of his own.
As Charles Schwab explained in its self-published report, the amount of assets he promised to keep until the maturity date, which we mentioned above, rose to $173.1 billion in December 2022, while it was “0” at the end of 2021. This refers to the amount of cash that the bank has to give, whether it has assets or not.
In the same report, the value described as the bank’s “instantly sellable assets” fell from $390.1 billion at the end of 2021 to $147.9 billion in December 2022. In summary, while the amount of money to be paid increases, the amount of cash to be paid is decreasing significantly. Unless Charles Schwab is able to restore or positively reverse this balance, it seems unlikely that he will face bankruptcy in the future.
We can see that Charles Schwab investors, who read the news, explanations and reports we mentioned, reduced their investments. Charles Schwab’s stock has fallen sharply in recent months as feared and panicked investors have sold out.
Rumors have begun to circulate that there are other banks experiencing these difficulties that Charles Schwab has experienced. Among the banks struggling with the same problems;
There are banks such as PacWest, Western Alliance, Bank Of Hawaii, BPPR, US Bank Corp.
This pessimistic and dangerous environment continues to frighten investors. Investors have questions about whether these problems experienced by banks will have a domino effect. However, experts agree that it will be useful to follow these events and be careful in the coming days.