Banking Collapse and the Gambling Industry: Navigating Uncertainty and Mitigating Risks
Gaming Eminence, provides an analysis of the recent banking collapse and its potential impact on the gambling industry.
While the recent below-market sale of Credit Suisse has caused concern among investors, other markets appear to be performing adequately, and central banks are taking measures to maintain the flow of money.
The sudden collapse of Silicon Valley Bank in the US and Credit Suisse in Europe has caused concerns among bank investors and customers about undisclosed financial weaknesses at their own banks. The question on everyone's mind is what is happening and what comes next?
Silicon Valley Bank, headquartered in California, is the largest US bank to have collapsed since 2008. In Europe, Credit Suisse has followed in the footsteps of financial crisis predecessors like Bear Stearns, which were sold at discounted prices.
Concerns about the financial health of regional US banks similar to SVB's balance sheet have led investors to sell off these banks. Despite market volatility, US tech stocks have remained stable, indicating that some investors believe the risk of a banking crisis will dissipate.
Nevertheless, the speed of SVB and Credit Suisse's collapse has spooked investors and customers. This rapid decline has been attributed in part to social media's ability to disseminate information quickly. SVB's collapse occurred just two days after the bank disclosed its loss from selling its bond portfolio. Credit Suisse initially received an emergency loan from Switzerland's central bank, which calmed the market. However, it eventually needed to be rescued by the country’s largest bank, UBS, in a deal worth almost US$3.25bn.
The purchase was supported by the Swiss government and includes an insurance scheme to protect UBS from potential losses from Credit Suisse’s riskier assets. Credit Suisse had suffered from scandals in recent years that had eroded its reputation and profitability, leading to a loss of confidence among investors. The purchase was welcomed by European Central Bank President Christine Lagarde, who said it would aid in restoring orderly market conditions and ensuring financial stability. While SVB and Credit Suisse differ in size, assets, and location, they both lost the confidence of customers and investors, leading to a liquidity problem.
On Friday, the stock prices of Deutsche Bank experienced a significant decline, causing a ripple effect on other prominent European banks. This raised concerns about the stability of the global financial system, prompting German Chancellor Olaf Scholz to express his support for the country's largest lender.
Deutsche Bank's shares closed at 8.5% lower on the German stock exchange, having dropped by as much as 14%. Additionally, the cost of credit default swaps, which are used to protect bondholders against the risk of the bank defaulting on its debts, had surged steeply.
As of today reported by the FT US, First Citizen Bank, has acquired SVB from the Federal Deposit Insurance Corporation (FDIC), which took over the lender in response to a rush of depositors withdrawing their funds earlier this month.
The sale has resulted in a partial recovery for European lenders, with an index of the top banks in Europe rising by 1.4% as of 9am on Monday. This is after the banks incurred significant losses last week.
HSBC purchased the UK branch of SVB shortly after the lender's collapse. First Citizen Bank has taken over all of SVB's $119 billion worth of deposits and loans, and it will open 17 former SVB branches as First Citizen Banks on Monday. Customers of SVB are automatically considered customers of First Citizen Bank following the acquisition.
In an effort to understand the impact of a potential banking collapse on the gambling industry, Gaming Eminence consulted several industry experts, including:
Nigel Eccles, CEO and Co-founder of Vault Laboratories, Inc.,
David Williams, Partner at Discerning Capital
William (Bill) J. Pascrell III, Esq. (BP3), Partner at Princeton Public Affairs Group, Inc.
The experts offered their perspectives on the potential ripple effects for gambling operators and customers, regulatory scrutiny, credit availability and cost, financial awareness, contingency planning, and the future of blockchain and cryptocurrencies in the context of banking instability.
GE) How might a banking collapse impact the gambling industry, and what are some potential ripple effects for gambling operators and customers?
Nigel Eccles - "So a full banking collapse is going to effect everyone. However, more likely is what we are going to see is more concentration into the bigger banks. That is problematic for gambling operators as typically the big banks don't service the gambling sector. The result will be it is going to be harder for consumers to get their money in and out of operators"
David Williams - "The current uncertainty across the US banking landscape is affecting the online gambling industry from both a micro and macro perspective.
To start, we are not bank investors so our perspective here is a little sophisticated than that of a levered financials analyst. That said, it is no secret that the added regulatory and compliance scrutiny placed on banks that service gambling operators is heightened which has led the industry to consolidate depository and credit relationships around a small number of institutions that fall in the ‘regional’ bank category. This coincidentally is the exact same part of the financial industry that is most on watch given the deposit run that took place a few weeks ago at Silicon Valley Bank and the events that are still unfolding with groups like First Republic Bank.
To our knowledge, MVB Financial out of West Virginia is the most focused on attracting deposits from the online gambling industry. Their client list which reportedly includes (or at least has historically included) the likes of Draftkings, FanDuel, BetMGM, and Rush Street Interactive is indicative of that focus. While a splashy headline may be that this puts them at higher risk given the situation with regional banks that continues to evolve in the US, we would assert that each situation is different and can only be evaluated on a case-by-case basis. Again, without intimate knowledge of MVB, it’s hard to say what their relative risk is but it’s been reported that over 90% of their deposits fall within existing FDIC protection limits which is very different than Silicon Valley Bank or Signature Bank where the inverse was reportedly true.
Regardless of the above, volatility and uncertainty usually increases risk and the broader trend that deposits are flowing out of regional depository networks towards the systemically important banks (i.e. JP Morgan Chase, Bank of America, Wells Fargo, and Citi) is likely to continue without a change in FDIC limits or other policy action. Just as a rising tide lifts all boats, the outgoing tide in this case will likely continue to pressure the regional players which may impact the institutions that are partnered with the gambling industry."
Bill Pascrell - "I am confident and very optimistic that there will NOT be a banking collapse. It is easy to cast aspersions from a distance. What has happened a few weeks ago with the fast collapse of Silvergate, SVP and Signature shows the fragility of the traditional banking industry but it does not lend itself to an overall banking collapse. The Fed and the White House worked aggressively to calm the market and depositors.
However, that being said, to answer the hypothetical question of the impact a banking collapse would have on the gambling industry and customers, I believe it would have a significant impact to slow the economy, result in job losses and potentially cause a ripple effect impacting the Gambling industry. This would cause less consumer disposable income to distribute to gambling operators and it would also slow the ability to access capital for existing operations, innovation and growth projects."
GE) If a banking collapse is caused by exposure to risky assets or investments, how might this affect regulatory scrutiny and the availability and cost of credit for gambling operators?
Nigel Eccels - "I don't think cost of credit is the real issue. I think the issue is when we have events like this banks become a lot more conservative and restrict their activities to 'safer' industries. For example in 2013 HSBC got fined by the US for banking for the Iranians. In response their risk management team decided to drop FanDuel as a client!"
David Williams - "On the margin, it’s not apparent that what’s currently happening in the banking system would lead to any increased or decreased targeted scrutiny of the gambling operators. What it will do however is place a greater emphasis on the banks’ balance sheet management, specifically related to the asset/liability duration mismatch that contributed to the situation at SVB, and this could have a significant impact on the availability of credit and the cost of that capital.
This should be another step in the process towards rationalisation for the US online gambling market. Since its inception in the US, operators have only existed in a near zero-interest rate policy environment and that has heavily relied on incinerating equity capital to acquire customers and achieve scale. With diminishing access to debt capital and/or the increased cost of that capital, equity valuations should be lower, the dilutive impact of fresh equity should be higher, weak competition should be driven out, and the industry should generally become more profitable and more sustainable from a long-term lens.
In that vein, it’s been admirable seeing the increased capital stewardship out of the biggest players in the space over the last few quarters as they move to quickly rationalise promotional spend as the equity capital markets significantly slowed last year and the credit markets now digest this ongoing bank crisis. Cash is king in a market like this and becoming self-sustaining should be priority number one for operators large and small.
As an aside, our opinion is that in the absence of the marketing war of the past five years, you are going to see a greater emphasis placed on product innovation to more sustainably acquire, retain, and engage customers which should be good for the industry in lots of ways, including from a regulatory standpoint. It might not be such a bad thing for the barrage of ‘free bet’ ads to stop showing up on every state regulators TV."
Bill Pascrell - "This would have a significant impact to incent regulators to over reach with the best intentions of protecting the public. The cost of credit to operators would sky rocket and dry up investments."
GE) Why is it important for gambling operators to stay informed about developments in the financial sector, and what contingency plans should they have in place in case of disruptions or crises?
Nigel Eccles - "So a gambling operator can't operate without payment rails so it is critically important."
David Williams - "Like any business or consumer right now, staying abreast of changes in the financial sector is of particular importance. Specifically, the treasury management function of most companies is front and center in a way it has not been in a long time or perhaps ever. The key objective is to broaden deposit and credit relationships, so that while events like those of the last few weeks may cause you or your business an inconvenience, your franchise is never at risk.
If you are in the middle of an equity raise and are fortunate enough to be able to take a little more capital, do it. If you have a credit line you can draw fairly cheaply, do it. When it’s raining outside, no one regrets having a bigger umbrella. Opportunities present themselves in these types of market environments and being able to act quickly is the most important differentiation you can have."
Bill Pascrell - "Monitoring and analysing the financial markets as well as risk management are a critical channels for any major gambling operator. Access to capital is very important to create a sustainable and growing operation. Without accessible capital the industry would slow down developments and innovation which are important to customer acquisition and retention. The larger the operation the more likely it is that you can sustain modest crisis or disruption. To prepare for this potential, the operator must build contingency plans to preserve capital and cash reserves."
GE) What potential impact do you think a banking weakness or collapse could have on the future adoption and growth of blockchain and cryptocurrencies?
Nigel Eccles - "I think we are already seeing a really strong growth in crypto currency due to concerns about the banking sector. In the gambling sector operators like Stake.com have become a leader by completely focusing on crypto payment rails. In time I see it going further with the adoption of non custodial betting protocols."
David Williams - "No real opinion here"
Bill Pascrell - "It would deprive crypto and blockchain its' fiat on-ramps in the US. Many in the crypto world viewed the shut down by regulators of Signature as a way to push crypto out of the US. Silverado and Signature were the two leading financial institutions providing banking services to crypto companies in the US. Shutting down these two crypto market trail blazers will make it increasingly more challenging and difficult to interact with the dollar based financial market and system. US regulators and political leaders have been slow to grasp, understand and appreciate the value proposition of crypto currency and blockchain. Any further deterioration or weakness in the banking sector will have a devastating impact on crypto and blockchain providing much incentive for them to invest in further education and advocacy to create a more sustainable industry."