Banking is Based on Trust

“Couldn't we have foreseen this?” a customer asks me after last week's surprising developments. Could the sharp rise in interest rates in 2022 or the bankruptcy of Silicon Valley Bank SVB have been anticipated? The answer, unfortunately, is “no”.* Of course, in the case of SVB, there were individual voices pointing out to losses on the balance sheet and even to the dangers of losing deposits. However, someone is always pointing something out. Only with the wisdom of hindsight do these voices emerge from the daily noise.

California-based SVB was shut down by the U.S. regulator last Friday. Before the bank run began, SVB was the 16th largest bank in the U.S. with total assets of $200 billion, making it the largest bank failure since Washington Mutual in 2008. Despite the deposit protection of the Fed, uncertainty persisted in the markets. Bank shares around the world recorded sharp price losses.

Once again, it becomes clear that purely quantitative considerations of the quality of a company's business model are not enough. Neither the core capital ratio nor SVB's rating was a cause for concern. Since the 2008 financial crisis, we have been very cautious about exposures to bank stocks. In Gutmann's equity strategies, we are invested in only a few selected banks worldwide. These include the largest, systemically important institutions - in other words, classic blue chip banks. It is precisely these banks, where concerned SVB clients transferred their funds to.

Currently, Credit Suisse is also not able to escape the headlines. We are not and have not been invested in the shares of this bank. In the Gutmann Global Bond strategy, we hold (on a look-through basis) 0.3% in a covered bond of the Swiss banking institution. Just under 0.2% were held in two short-dated bonds (2023/2024) that will be tendered in part or in full by the issuer. Each bank has different custodians and correspondent banks. Credit Suisse is not one of them for Bank Gutmann. I think in a situation like this, accurate information is important.

The highest asset at Gutmann

Incidentally, we also do not hold any bonds issued by the banks concerned. Since the beginning of the year, we have increasingly invested in very safe covered bonds in the financial sector, thus deliberately reducing credit risk. These safe securities are in strong demand in uncertain times. Accordingly, bond prices developed positively and yields fell. At the same time, the markets sharply scaled back their expectations of interest rate hikes. This could quickly fuel the stock markets as soon as the uncertainty in the banking sector subsides.

The trust of our customers is the highest asset at Gutmann. In tennis parlance, we place our business model far from the outline, preferably in the middle of the court. We do this by investing customer deposits in line with matching currencies and maturities and by not taking any off-balance sheet market risks. Our lending business is small in scale and essentially collateralized by borrower securities deposited with us.

For Gutmann, an owner- and partner-managed bank, this has been normal banking business for decades. It lets both customers and employees sleep well at night. That is how it should be.

* Let me philosophize a little. The surprise must always surprise, otherwise it wouldn't be a surprise. Only with some distance and the wisdom of hindsight, do we wonder whether it was really such a surprise or if one should have foreseen it. This is especially true if you were not around at the time and wonder what “these people” were thinking. 

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