Are Silicon Valley Bank and Credit Suisse the start of a new banking crisis?
First there was a run on Silicon Valley Bank in the US, and it could not find the cash to prevent a run on the bank.
Then other US banks began to totter until it became clear that the Fed would guarantee depositors.
And days later the shareholders of Credit Suisse took flight and effectively abandoned one of the bastions of world banking, which has long been troubled by a failing business model. Only the Swiss government's offer of a €50bn cash lifeline is keeping it afloat now.
There has been further fallout. Many smaller US banks have seen their share prices fall, dramatically. Most French banks did likewise yesterday, presumably because they have exposure to Credit Suisse. And UK banks have seen share price falls of 10% or so. This is contagion of a sort: it is markets saying they don't trust this sector, and I would say rightly so.
There was a time, 50 years ago, when this would not matter, much. Banks were at the time relatively small businesses. They did not appear high in the FTSE. Their business modeis were sober, safe and by and large secure. Runs on banks did not happen. (The ‘73 banking crisis was in secondary, property backed, banking).
But then everything changed. Thatcher did the Big Bang. Capital market liberalisation moved the big banks into speculation, dealing, tax havens and money laundering. Risk, and what appeared like rewards, followed.
But it was all a myth. 2008 revealed that. Loan was piled on loan, which was then financialsed and then appeared again in the balance sheet. And the actual worth was? Well, who knew? And who still does?
This is the problem. Silicon Valley Bank may have been solvent, but under stress it did not look like it. Credit Suisse would not require a €50bn lifeline if it was solvent. And who the counterparties to Credit Suisse risk are is not known, but we do not want to go near Lehman again.
So, government lifelines are the order of the day. Credit Suisse may be the last required, but I doubt it: the banking system is so interconnected it is impossible for that to be the case, and the Swiss government will not pick up the tab for all the risk a Swiss resident Bank has created.
And so, we are back to the fact that, as I often argue, banks are just government licenced franchise operations, as are their money creation processes. There is no such thing as an independent bank. They function as a system and at the heart of that system is the ability of a country with a fiat currency to create money at will.
So three questions. First, will this get worse? I suspect so, simply because of the speed with which it is developing.
Second, will it be like 2008? No, because banks are much better capitalised and this time we know what to do.
Third, why do we let banks continue to get away with exploiting the implicit guarantee they are given by the state? I wish I knew the answer to that, because if I did I would also know why, incomprehensibly, it is planned that interest rates stay high for years when that can only help banks and the wealthy.
But in those last words I do, of course, find my answer. Banking is welfare for the wealthy, and there are no limits.
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“…. banks are just government licenced franchise operations, as are their money creation processes. There is no such thing as an independent bank. They function as a system and at the heart of that system is the ability of a country with a fiat currency to create money at will.”
I think it would be fairer to the record to say they are failed government licenced franchise operations. In Scotland we no longer really possess a banking sector. Big Bank destroyed a very successful banking sector that had ironed out the weaknesses in the 18th and 19th century. London, post-Big Bang obliterated Scotland’s banking system, and banking standards. I never believed the post-crash tinkering with the system failure of 2007 would be adequate, or that we would not be revisiting the problem; sooner and more often than mere unforeeseable exigencies in a well run system would throw up.
This has to stop. Meanwhile, frankly in a well run polity this cohort of bankers would not be allowed to do anything, without direct supervision. As a minimum in High Street UK banking there needs to be a clear out of almost the whole failed Thatcher-inspired generation of bankers and their wretched bonus-driven culture, which probably means some kind of division between High Street and Investment banking again, if nothing else is done. You can turn pirates into privateers, and privateers into the Royal Navy; that is how the Empire was first built, then held. But it seems that while you can bring in regulations to take the banker out of piracy; but you can’t take the priate out of the banker.
Richard,
According to Simon Nixon in today’s Times ,Trump to encourage greater risk taking and growth exempted US regional and specialist lenders from the stress tests, thereby no longer designating them as systematically important . SVB invested $151bn of uninsured deposits in US bonds, the subsequent collapse and response shows ” any pretence that SVB’s failure does not pose systematic risks was blown away by the response of the regulators”.
If the banks are given effectively a full guarantee by taxpayers if they go bust what incentive is there to be reasonably competent?
None that I can see when for example the UK says bankers can be paid what they like and the UK will pick up the tab for their failure.
Good question re competence
In theory there is none, so do we change the rules of the game and make them technical administrators?
And do we increase regaultion?
Andrew Berkeley, Richard Tye & Neil Wilson, ‘An Accounting Model of the UK Exchequer’ has been discussed here before. Everybody who comes to this site should read it; and I suspect it should be required reading at the outset of anyone contemplating studying economics. Then read Minsky. Then read Mehrling.
Apart from re-introducing something like the Glass-Steagall Act surely some government, somewhere needs to have the courage to say that no longer will we tolerate privately owned Businesses that are too big to fail and re-organise its business sector on that basis.
Until that happens Banking is somewhere between a protection racket and a suicide bomber.
You accounting experts probably know this exhaustive analysis of the UK money/banking system
https://gimms.org.uk/wp-content/uploads/2021/02/An-Accounting-Model-of-the-UK-Exchequer-2nd-edition.pdf
Seems to confirm that the private banks are totally integrated into the government controlled system.
If ‘high street’ banking is separated from investment/pirate banking presumably the pirate stuff will still keep on pirating and probably will still be too big to fail ? In that case shoudnt there be some kind of ongoing levy on them to pay for the implicit govt guarantee? Plus some kind of additional transparency/ audit requirements to show they are sufficiently liquid if interest rates go up etc?
I am familiar with that paper and think its arguments correct
And yes, I think your conclusion is correct
Eventually the Royal Navy annihilated the pirates; even more heavily armed, and good at it because the Navy was filled with poachers turned gamekeepers. The modern answer is the same; heavily armed regulation. You are dealing with pirates; their ancestors are Kidd, Teach, Avery – and the man who began it all – Drake. Piracy is our history.
Would not paying a levy be tacitly condoning incompetence?
Separation of retail and “investment” banking by all means.
But a super efficient, powerful regulator is required with full power to claw back money paid out to directors /staff and prosecute.
Can you see any UK financial institution suing former directors/staff like JP Morgan and McDonald’s?
Maybe
Didn’t Barcays?
US and Swiss situations are quite different, though both relate to failed regulation.
The move to mark to market securities globally after the last crash was unwound to a degree in the US by the Obama administration within just 2 years, which seems absolutely incredible to me. Trump recklessly reduced regulation even further more recently, reducing capital requirements to zero I think? Both parties guilty of a deliberate policy of low or non-existent financial regulation. Which begs the question, why would anyone want to invest in the US?
US banks are reported to have unrealised losses of just shy of 1 trillion dollars that under mark-to-market would be suppressing their balance sheets, and of course the b-word: bonuses.
I don’t know what a banker’s bonus would be on profits of 1 trillion dollars but I do know it’s a lot. There is a trillion dollar incentive there to inflate asset prices and bonuses thereon.
The Credit Suisse crisis appears to be in part due to accounting issues, though it is not clear at this stage whether they were innocent or criminal in nature. Auditors asleep at the wheel again? But bankers know how to get around the auditors; move things around. Auditors are presented with a picture. They might well find the picture the day before was very different.
Europe does at least have some degree of comfort via Basel II though this has not prevented CS from effectively getting a national bailout so how much of a backstop is it? I wonder if current work on Basel III has led to issues being identified at Credit Suisse in terms of risk.
The US currently appears to have no capital requirements and no mark-to-market of securities, which to my mind ought to mean that no financial institution outside the US ought to have anything to do with US banks. US financial institutions are just bombs waiting to go off.
It seems incredible to us Europeans that this is allowed to happen, but the US appears to have a pathological hatred of regulation and addiction to profit that drives them to operate their financial markets on a sort of Wild West level. As Biden said the other day: “That’s capitalism”.
But it’s bad capitalism. It’s the degree of badness that gives capitalism a bad name.
Make false profits (oops), take the bonuses thereon, retire to the Bahamas, let the next ‘generation’ clear up the mess. This is not just aided and abetted by US politicians red and blue, it is encouraged. The illusion of wealth seems to be as important as wealth itself (see Trump).
Anger towards bailouts is misdirected anger. Bailouts are a necessary evil (at least at the level of a system risk bank like Credit Suisse). The anger should be directed at the need for a bailout, not the bailout itself. This anger should be directed more at the politicians than the bankers themselves. Obama and Trump have used legislation to override the likes of the FASB (Financial Accounting Standards Board) because it suited their short-term political objectives. The result? A trillion dollar ticking bomb (and that’s just the Obame element, the Trump element is unquantifiable). OK, that’s over-egging it. The Fed have said they’ll step in. The Swiss government also. But it is in everyone’s interest to remove the conditions that have forced these two interventions in the first place, rather than rely on them (and more to come). Governments should not be meddling in accounting/regulatory methods for political purposes.
Thanks
Mr McCann,
“Anger towards bailouts is misdirected anger. Bailouts are a necessary evil”.
I do not think the more thoughtful anger (I concede it is still anger) about bailouts is not ‘Bailouts’ per se, but the number of them, the eyewatering scale of them (enough to give decent, workable pay rises to most of the undrpaid in Britain), and the alarming rate of increase in bailouts; especially when we have been told by Government, central bank and the commercial banking sector that the lessons of 2007-8 have been learned: when clearly, and obvious to all but the deliberately blind, that quite clearly they haven’t been learned, and the same old bonus-chasing, bad-judgement banking reasserts itself ‘at the drop of a hat’. Your defence of your industry does not promote confidence, but – with oplogies, because i am sure it is sincere – simply looks obtuse.
Regulation and the law is not tough enough in the finance sector. The regulator requires to prowl, well resourced by clever, expensive professionals (including poachers turned gamekeepers if necessary – I would term this the Royal Navy model), and heavily armed with a mixture of powers in Law or paralleling Customs & Excise: the pips should squeak. Then we need a new High Street Bank culture, uncontaminated by the toxic bonus culture of the current obscene model, and new mutual funded banks; plus major public sector backed National Investment Banks to provide industrial sector debt financing (if that goes wrong the politicians are in the firing line). The gloves need to come off.
My thought is that if a bank – or any other business – gets a bailout, it should be in exchange for shares at par (or even a discount – especially if they’ve been trading for less)
Simple question – what is the point of Risk Registers and Risk Management Plans. Some months ago we saw the impact of rising interest rates on Liability Driven Investments and the resulting scramble for liquidity.
We can see this again as rising interest rates once more impact the carrying value of bonds and gilts. Investments added to the balance sheet seemingly without thought of a disposal strategy.
Was the BofE aware of the latent risk when increasing rates, was the regulator,
the auditors?
Calls for an increase in bank capital without a reliable risk assessment and management plan being in place make little sense.
The 2008 fiasco revealed the incompetencies of directors, audit committees, rating agencies, internal and external audors and regulators. What proof have we that things have changed?
Thanks
How do you create the situation which does away with the “need for a bailout”?
Take the UK , FCA toothless, BoE seemingly intent on destroying the economy to do away with the labour shortage, Tory government intent on no financial regulation as a Brexit gain, Labour apparently endorsing this.
Angry, you bet.
Bankers are not “bad” – many of them are evil. CUM-EX (no not a porno film) still rumbles on. Started by a bank in the late 1980s it is fraud – pure and simple – at its base it reclaims tax from the state, that was never paid through a legal sleight of hand. Christoph Spengel, a tax expert at the University of Mannheim, calculated that German tax authorities lost almost €32 billion (US$ 36 billion) between 2001 and 2016. Spengel describes this as, ‘the biggest robbery in European history’ (Deutsche Welle 2018).
As somebody noted (investigative journalist that managed to get into one of the CUM-EX seminars – held by banks to promote tax fraud) “it was made clear that what was being proposed would mean fewer kindergarten places in Germany – nobody left the room”. This is evil.
Drug pushers rightly get a bad press. They look good compared to most bankers, & it’s not like this hasn’t been going on for decades – bankers making the world that bit shittier. Remember the 1960s and the asset strippers? Well they could not have done it without………….the banks.
“Bankers are not ‘bad’ – many of them are evil”
That’s simply wildly far from the truth and totally unhelpful language to be using.
I’ve worked in banking and some of the people I respect most in life worked in banking too. Diligent, funny, honest, kind, shrewd, vulnerable – just like people in other careers.
Yes there are some bad apples – as I know to my own personal cost walking in to work one morning to find a decade’s pension contributions had been wiped out overnight by one trader – but they are few and far between in my experience. The problem is that one bad apple can literally take out the whole barrel. Almost as if that proverb was coined by a banker.
Mike is prone to overstatement
But I am afraid that I have come across very little competence and have experienced a great deal of time serving blind indifference to anything but the bank’s agenda in 40 years of professional relationships with banks.
Unthinking is my best summary
They may be nice people, but that is not good enough
The nice people you speak of Sean are probably not in senior management or partners who sit with their equally evil lawyers (please note Mike) looking for holes in tax law etc., to exploit.
We know what happens to ‘nice people’ Sean in banking – they’re called ‘Risk Managers’ aren’t they and they are frequently shown the door if they are not quiet.
But those fewer kindergarten places are down to one source only – stupid, lying politicians who insist on believing that tax has to pay for everything.
But in essence what we have is largesse for the banks – bailouts and state help and what can only really be described continuous austerity for everyone else in the lie that there is only so much money in the system.
And it seems to be getting worse and not better despite the heroic efforts of our host.
What was it that Frank Zappa said?:
‘Hydrogen is not the most plentiful element in the universe. The most plentiful element in the universe is stupidity’.
I have a close relative who is high up in the insurance business in the City of London and who is intimately acquainted with the banking sector. He moves in those circles. He is not naturally a Tory, though he has voted for them in the past and yet his assumptions and beliefs regarding the essential rightness of classical economics, liberal free trade and what one might call small c conservatism are ingrained and impossible to shift. He inhabits a bubble of privilege and has been exposed to the group think of the Big Bang deregulation era for his entire 30 year career. If questioned and exposed to new ideas and to things that contradict the neoliberal world view, he will either ignore the evidence or ascribe malign intent to the bearer of the new information.
I think this is true of most people in the banking and finance sector, though I think it obvious that many are genuinely immoral too.
Your work in trying to shed light on issues like this is vital Richard, if there is ever to be a change in the system. Keep it up!
A professor from Kings College London writing in the Guardian has stated that banks take in deposits and then lend out to other customers. Isn’t it the case that when a bank makes a loan it creates it itself and when the loan is repaid the money is destroyed? If this is the case , the monetary understanding in higher education is woefully lacking?
Who was it
Please don’t tell me it was Jonathan Portes
Not Portes but Jens Hagendorf discussing the Credit Suisse situation. I didn’t name him initially in case I unfairly misinterpreted what he was saying.
You didn’t
He got it totally wrong
Richard – there is nothing to add – you’ve summed it up a treat as have many above.
It puzzles me why so many voters seem to just not acknowledge this because its in plain sight of all.
I mean whole cities and towns should be by rights marching on Parliament to say enough is enough.
One day perhaps………………………..
Perhaps…..
[…] Cross-posted from Tax Research UK […]
I do remember the Buffett adage: only when the tide goes out do you find who’s been swimming naked.
I feel sorry for the boneheads who gave 4 billion to credit suisse to spin out the First Boston brand. The scandals are mind boggling: Japan in the 90s, the Marcos cronies in the 80s is the most disgusting, sanctions breaches, US and European tax scandals, spying scandals, drug trafficking, Archegos, Greensill, Mozambique….It’s probably even worse than Deutsche Bank and HSBC.
American banks fear the DoJ. Let them buy up the European banking system.
Add Danske Bank to the list. Filthy outfit
Hi Richard,
How come, like KPMG, the auditors get a brief mention in regards to the Silicone Valey Bank, then like Macavity the cat are not there.
Do they just have really good PR people or built in auto-absolution?
Good question
But the auditor questions tend to come later
Is there a typo here ?
“and the Swiss government will not pick up the tab for all the risk a Swiss resident Bank has created”
What, apart from the unnecessary aoutcorrected capital?
It’s reassuring to hear you say say that it will not be like 2008 because “banks are much better capitalised and this time we know what to do”. But didn’t SVB fail, at least in part, because when depositor confidence tanked it didn’t hold sufficient cash in reserve to fend off a run on the bank? And secondly, even if this isn’t a repeat of 2008, do you think the UK Govt will use it to ‘justify’ continuing austerity and privatisation?
The UK government uses anything to justify austerity, and there never has been a need for it
Last night I watched a 2hr. program from “Frontline” called the “The age of Easy Money” blaming current inflation, economic problems on, well.. the age of easy money that started in 2008 and has since seen several repeats of quantitative easing. While watching I wanted all the time to hear an MMT explanation of the problems, I’m sure the focus, explanation would be entirely different! Sadly I don’t think such an opportunity will be offered! beyond acknowledging that government can create money it went no further than the idea they created too much and we are now all paying for that profligacy. I’m sure it can be streamed, Frontline is usually a responsible fact non sensational series. Would be interested in an MMT explanation of our current situation!
I could not get the video. It is US based