Groupthink is immensely powerful. As I noted yesterday:
KPMG issued a clean audit report on the 31 December 2022 accounts of Silicon Valley Bank on 24 February 2023. That's another negligence claim in the making and another addition to the grand catalogue of audit failures. Audit reform is massively overdue. https://t.co/efRV3hGpOJ
— Richard Murphy (@RichardJMurphy) March 13, 2023
KPMG were obviously unable to see the risk inherent in Silicon Valley Bank's balance sheet only days before it collapsed.
I could describe that as incompetence. In fact, I will describe that as incompetent. It was. Their only defence is that they were far from alone.
As the FT has reported thus morning, the markets were harsh on smaller US banks yesterday. Many lost more than 10% of their value, and that is despite an assumption that they will be bailed out if in trouble: the Fed cannot afford a systemic banking failure on the US.
Not that the Fed is free from blame here. Its interest rate policy created this crisis. That policy has been unnecessary. It cannot and will not stop US inflation. It can and still might wreck US finances. That was a trade off never worth making, just as that trade off is also not worth making in the UK.
Now the markets are sending messages to the Fed by down-pricing interest rate expectations. Last week it was thought the Fed might be imminently raising interest rates in the US by another 0.5%. That expectation has almost disappeared now. Anticipated rates have fallen by that sum. The feeling is that rates might now have peaked: the risk of market turmoil has imposed an effective cap that the Fed cannot ignore.
Groupthink has changed. SVB changed it. An auditor could not see that. Like everyone else in the mainstream they believed the Fed could raise rates without consequence. Now they realise that they can raise rates, for sure, but the consequence is destructive.
Danny Blanchflower and I discussed this yesterday. We agreed that the Fed has no choice but guarantee all depositors of all smaller banks in the US right now: unless they do there will be a flood of money to JP Morgan and a collapse in US banking. To pretend there is no crisis in US banking, created by the Fed, would be absurd in that case at this moment. Only state guarantees can prevent that crisis unfolding.
But the question is, what then? What price should be extracted for saving US banks, yet again?
Is it more tax?
Or the reversal of Trump's regulatory relaxation?
Or more regulation?
And better audit?
Or a levy for the cost of capital that the state supplies to these banks?
All should be on the agenda. Any pretence that the US banking system is in good order today is false.
So what here in the UK? We might need all those things too, especially in the light of recent cuts in tax on the banks, the promise of deregulation Sunak has made and the massive windfall gains the banks have made here as a result of rising rates. Our system is not at major risk from SVB, although there will be some contagion. But to pretend that our banking system is in good order is as absurd as it was to claim that in the US was last week.
Our system is also totally and utterly dependent on state support to survive. All bankers know that, just as Northern Rock proved, they are underpinned by an implicit state guarantee that transfers all downside risk to society, leaving them with the gains. This is moral hazard writ large.
I do not know why we accept that. I am clueless as to why Labour is happy about it.
Banking needs reform. We do not need central bank crypto currencies, which is the groupthink solution. What we need is a public interest banking platform at low cost that ensures that transaction processing can take place without being put at risk by corporate failure. And we need the reseparation of this public service from the rest of banking, whilst mortgages move to a US model of state backed certainty with rates fixed for the life of the mortgage so that the threat to so many in this country, now being seen as rates rise, is removed forever.
Could this be done? Of course it could. But groupthink denies it because groupthink likes things the way they are.
There is no point noting KPMG suffered from groupthink unless we are willing to break away from it.
Will we? I doubt it. There's too much money in the status quo. Until, that is, we gave to bail it out again.
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It seems more like criminal negligence, especially when you consider the fees they charge!
I cannot understand why central banks (or sovereign governments) would consider cryptocurrencies. The only reason they exist is to undermine central banks and sovereign currency issuer. It is their purpose. If you listed what cryptocurrencies are best devised to do you would not look far before you found ‘secrecy’. But first on the list? Surely money laundering?
Agreed
It is bizarre
Actually, incomprehensible
Actually it is really just neoliberalism ‘in the raw’. Acquire what you can, however you can; and hang on to all of it. It is yours, no matter what; tax and transparency are theft.
As I wrote that I suddenly thought, neoliberalism reminds me of John Locke; understandably he didn’t really grasp or understand the development of capitalism; but his account of property rights is philosopically, curiously close to neoliberalism.
I’m hearing variously that the central banks will be introduing remotely programmable tokens so that individual spending can be tracked and limited (as punishment) and also that they’re introducing them to replace correspondent banks with a view to ending dollar hegemony, this by providing a parallel banking service which functions outside the existing system. Both are complicated to explain in depth and, in my view, dedollarisation especially, plain weird. If this is some secret plan, how come I can know about it in my living room in Surrey? Won’t mighty America have noticed this potential too? Neither explanation would seem to make complete sense then but neither does the almost hallucinatory BofE explanation for the introduction of CBDCs either. We live in strange times. My turn with the bong…
If that is the plan there will be a public backlash
I totally agree about the groupthink phenomenon but would also add that dodginess in banking seems to have been normalised – a blindness to risk and the laws of how money works – it’s as if those who are meant to watching over the whole thing have been desensitised.
I can’t remember if I got this link from here or not… anyway the Millers (Gina, Alan) would seem to agree on that last and produced a handy list of Bailey’s Nelsonian behaviours while at the FCA, this to protest his (then) forthcoming appointment as BofE governor. It’s linked from here https://trueandfaircampaign.com/fc-reports/asleep-at-the-wheel/
I should perhaps declare that I have a son working with Gina Miller at present, although that is his decision and has nothing to do with me and has no influence on my thinking
Do you envisage a public interest banking platform as something different from a Central Bank Digital Currency (CBDC)? Personally I am somewhat suspicious about CBDCs.
Yes, I do
It is a conventional banking platform run in the pubic interest
Call it a Girobank, if you like
Not a Sparkassen network then?
It could be, so long as they all use the same network underpinning
In addition to the ‘we are doing very nicely out of the system as it is thank you’, could it also be a social psychology phenomenon?
The state of the world’s banking system is so catstrophic (see Richard Murphy and Ellen Brown ) and the action needed to stabilize things is so drastic or revolutionary that governments, auditors, bankers , academics, go into a state of denial – a sort of ‘Dont Look Up’ .
Set against how we would like the Banking Industry to be run/regulated the SVB failure is a disaster… but perhaps we set the bar too high? Perhaps we should look at comparisons with 2008?. Let’s see what has and has not worked better (if anything) since then.
The first thing to say is the main villains here are the management of the bank. They took reckless risks for personal gain… but it will not be news to readers of this blog that learn that “(some) bankers are greedy”. In this area we will only know if things are better once we see the extent of “clawbacks” and a conviction for fraud.
At its heart, this appears to be about two things; (1) overnight deposits invested in long term US Treasury Bonds and (2) a closely knit depositor base that all acted similarly (meaning that, even by the standards of a bank run, this was vicious).
(1) On the surface a deposit book backed by a portfolio of UST bonds is about as safe a book as you could imagine….because USTs can be converted to cash “same day” by selling or posting as collateral in the repo market. All depositor claims could be met immediately….. up to the value of that portfolio. One problem was that the market value of that portfolio was mis-stated – it was kept on the “banking book” rather than the “trading book” and marked “at cost” rather than “at market”. This seems to me to be an abuse of the “banking book” which is designed for banks to hold loans where there is no market price (eg. loans to small business etc..). Now, this interest rate risk would be measured and reported to management and regulators… and at the moment, we have no idea why they did not act. It would also have been noted by KPMG in the accounts… but is that the end of their duty?
(2) There are lots of rumours of skulduggery in the VC community that might have hastened SVBs downfall but we should note that a well run bank would not have attracted such attention… but it was not and it did. Because of the very narrow deposit base of mainly “uninsured deposits” everyone ran for the exit at once and even its large UST portfolio could not cope and other assets were not liquid enough to meet the deposit outflow.
So far, so bad.
The real test comes now. Banking failures have been around as long as banks… and will continue. The issue is to try and insulate the innocent and assign the cost to the “right” place. So, how are we doing?
(a) Insured depositors (those deposits under $250k) are fine (give or take a bit of stress and 24hrs without access to cash)
(b) The broader banking system is not directly exposed. Regulations ensured that SVB was not financing itself with loans from other banks so there is no direct contagion.
(c) Indirect contagion (depositor flight from small to large banks) is happening but this appears manageable because (i) other banks’ liquidity positions are good (ii) the Fed is acting as a Central Bank should in “recycling” the excess deposits at large banks to smaller banks that are suffering an outflow. (The issues here are “at what interest rate?” and “against “what collateral”… and so far this seems OK but watch this space).
(d) Government. At this stage there is no government money being put in (FDIC is industry financed).
(e) Credit to the real economy will be curtailed as regional banks try to stay liquid but this has been countered by a fall in market interest rates in anticipation that the Fed will alter course on monetary policy.
5 clear changes suggest themselves.
(1) We need a government bank where people can leave money without risk. (Girobank in the UK)
(2) Deposit insurance needs an overhaul. The $250,000 limit was the same in 1886 when I was placing deposits with US S&Ls. That might be fine for individuals but for companies? (The UK needs a similar review).
(3) The US needs a unitary regulatory system – SVB may have fallen through the State/Federal gap. (We had the same problem in the UK but have changed).
(4) Banking book rules need a look
(5) LCR rules too… although changes to deposit insurance might be enough.
….but the story continues
All very relevant and pertinent although I am pretty sure you meant 1986 and not 1886. I could have edited that but you might really be that old 🙂
More important is the contagion route you summarise: the Fed has no choice bu guarantee deposit to contain this
So, banking is socialised again
No. Not that old.
At this point losses are not being borne by government. The Fed is lending at market rates against collateral…. as it should do.
Depositors are not being guaranteed…. as far as I am aware.
We need to watch developments…. but I am tempted to say So far so good.
Contagion took time in 2007
In fact, it was 2008 when it did
B&B etc
“Contagion takes time” – well, yes and no. In a bank run it takes no time at all… but I take your point – I take the start of the Great Financial Crisis as April 2007 (!!) when Household Finance (then part of HSBC0 announced huge losses on its mortgage portfolio….. a full 15 months before Lehman Brothers failed.
But (and these are the most dangerous words in finance) “it’s different this time”.
The GFC was all about credit impairment…. and was clear that deteriorating credit was going to hurt everyone… but it took time to see mortgage delinquencies rise and feed through to losses on MBS. Also, there was a web of interbank transactions that meant banks were all exposed to each other.
Here, the impairment was due to poor/reckless interest rate risk management which may not be unique but is not ubiquitous. Also, LCR has stripped away all the risks of direct contagion through interbank lending. So, my best guess is that this will end as a minor footnote in the history of bank failures.
I could be wrong… and if I am it will most likely be because we start to see serious credit impairment. Indeed, one could argue that the GFC started that way as rising rates in the 2006 were a root cause (among others) of rising mortgage delinquencies in the US. Indeed, higher rates are designed to restrain activity and send companies bust – that is why you/I find it soo absurd a way to tame inflation – so I do see declining credit quality as a risk. Set against that rising risk we have a banking system that has roughly 3 times as much capital set aside for a given level of risk than was the case in 2008.
So, I need to wait and see if there are increasing loan loss provisions before I get too worried.
In the meantime, the 5 changes I suggest make sense whether or not this is a “serious” crisis or not.
If rates stay at the current levels impairments will be serious
“Banking failures have been around as long as banks… and will continue. The issue is to try and insulate the innocent and assign the cost to the ‘right’ place.”
We cannot guarantee no banking failures, but the problem of abject lack of awareness of looming crisis remains. Who saw an inkling of this coming, at the BoE? The HSBC huddle and deal suggests central bank and Treasury in trouserless, Whitehall farce mode; yet again. The problem here is that in the 21st century the technology, plus deriviative, plus shadow banking, means there is less and less time to react when there is a crisis. I also worry about all the laundered money washing around, and who is using it, for what, and by what means.
You suggest the insulated nature of the failed bank means there is unlikely to be contagion; but that was happenstance, and doesn’t address the ignorance and surprise of what was happening, until too late. In the digital age it is ridiculous that we cannot do better; we require even more foresight than passed in the 20th century (and frankly that didn’t go well either, too often). If we can’t have the foresight, then we require stricter regulations. Insufficient concern, or even official complacency about the risks is the issue here. I suspect we need more comprehensive, real-time oversight and close regulator audit at the first whiff of a flashing light (assuming we have the ‘light’, and can trust its accuracy and reliability; going to far? I confess total scepticism about commercial bankers, beyond their capacity to calculate their bonus). In addition even if fleeing depositors find bigger more secure banks to relocate to; this just mean they are being herded into the opportunity from TBTF bonus chasers, who are not passing on the interest rate rises to depositors. So they remain potentially volatile depositors, and certainly and rightly unhappy.
I am sure some will think I am expecting more than can be delivered of banks; but we are living in through a technical revolution. I suggest we cannot keep up with a money revolution on this scale, by using small incemental improvements that scarcely pass muster now, and failed us too often in recent history. What can we say about banking? How often can we say that they ‘nipped the crisis in the bud’. The LDI crisis, perhaps; a bud it only cost £30Bn to nip. Forgive me being sniffy.
If you go through that document I linked you’ll see Police & Crime Commissioner Anthony Stansfield say a senior police officer has described the banks to him as an Organised Crime Syndicate. This isn’t some sort of aberration, this is our society, which of course isn’t ours at all, it’s theirs and our relationship to it is the same cattle have with the farm which bred them and milks them. Once seen in that light, society makes sense.
I share your frustration and anger… but I am afraid that greed and stupidity cannot be outlawed.
To some of your specific point…..
A bank failure foreseen is a bank failure avoided. Almost be definition SVB like failures will be a surprise and, in fact, I think the Authorities in the US and UK have moved fairly quickly.
I would also suggest that the lack of contagion (so far) is not just lucky it is a direct result of the changes in rules that came out of the GFC (more capital, better liquidity).
Better oversight? Yes, yes, yes! But (as with tax and HMRC) the poachers have bigger budgets than the gamekeepers.
I don’t know what the solution is. But we need better oversight, more capital and more liquidity…… and jail time.
Having been fairly relaxed about systemic implications of SVB yesterday morning…. the headlines about Credit Suisse are making me a bit twitchy.
It is not news that this bank is a bit of a basket case but when it rains it pours and we see “contagion” operating through channels we might not have thought of.
I still maintain the system is in far better shape than it was in 2007… but is it good enough? I hope so.
…. So yes, my view is shifting. As new information emerges I do modify my views.
And now other leading European banks are seeing their shares tumble
I think contagion is happening
Reuters has commented around luchtime today, as follows:
“First Republic Bank (FRC.N) fell 13.1% while peers Western Alliance Bancorp (WAL.N) and PacWest Bancorp (PACW.O) slid 7.1% and 18.4%, respectively, before trading in their shares was halted for volatility.
Big U.S. banks including JPMorgan Chase & Co (JPM.N), Citigroup (C.N) and Bank of America Corp (BAC.N) fell between 5% and 1%.
The KBW regional banking index (.KRX) slid 3.8% while the S&P 500 banking index (.SPXBK) dropped 4.2%%.
‘Anything negative from any highly visible institution, in this case Credit Suisse, is going to have ripple effects across the financial sector,’ said Michael James, managing director of equity trading at Wedbush Securities.
Given all the turmoil with Silicon Valley Bank and Signature Bank, expectations have dramatically risen come that the Fed will keep rates unchanged, or maybe raise them (by) 25 basis points.”
I remain a sceptic; whether or not we pass through this on whatever ‘wing and a prayer’ we happen to choose, dispensing sticking plaster like confetti, and a Government more worried about preserving a stable platform for bankers bonuses than providing sound High Street banking.
“we see ‘contagion’ operating through channels we might not have thought of.”
You certainly know how to send a chill right through me, Clive. My problem is that over recent years, our regulatory and audit functions in banking, shadow banking and finance are so ‘last-century’, in a different, long dead world, that bankers are frnakly not equipped to understand the “channels we might not have thought of”; which are now growing exponentially, and over which we seem to have no effective grip at all. Sooner or later, now or then, this will not end well. Minsky was right, and sticking plaster is not the answer.