As rising interest rates turn up the pressure on the whole financial system, a few things have started to go pop. The big question is whether this is just the system blowing off steam or whether the whole thing is about to go kaboom.
The two things that went pop recently were Silicon Valley Bank in the US and Credit Suisse here in Europe.
Who are Silicon Valley Bank (SVB)? Ireland 2023
SVB is considered a medium sized regional bank in the US, but that doesn’t mean it’s small. At €250Bn in assets SVB was over twice the size of the biggest bank in Ireland, Bank of Ireland.
Compared to the major US banks though it’s only a toy, so it’s meant to be no great shakes if banks like this get into trouble.
In fact that’s why the bank successfully lobbied the Trump administration to remove regulations intended to limit the fall out from a bank blow out. SVB management and a number of other regional US banks argued that banks under €250Bn weren’t ‘systemic risks’ to the banking system, so didn’t need the extra red tape.
Yet, when things went off the rails for SVB the US Government decided it did in fact need to intervene, as the bank going under could put the wider financial system at risk.
What happened with Silicon Valley Bank (SVB)? Ireland 2023
SVB had grown rapidly over the last decade or so, by attracting the great and the good of the tech sector to bank with them. As the companies in Silicon Valley grew so did SVB.
The wheels started to come off though precisely, because SVB was so successful in tech. As interest rates started to escalate tech companies found themselves struggling to get new funding. As a result they started to eat into the cash they all had stashed in SVB.
SVB had invested that cash in long term bonds, which is a good bet if you hold them to maturity as they have a guaranteed return. However, with bank deposits dwindling the banks treasury now needed to sell the bonds to raise enough cash to pay back their depositors.
The problem though was that rising interest rates also mean rock bottom bond prices, so when SVB sold their recorded asset value plummeted overnight.
The big write down of assets spooked the cash strapped depositors who all of a sudden realised their hard won funding might be about to go up in smoke, causing them to pull all their money from the bank. Cue mass panic.
What’s the story with Credit Suisse? Ireland 2023
Credit suisse is the same, but different. They are even bigger than SVB weighing in at over €1 Trillion in assets, but the bank had been rocked by a series of scandals over the last twenty years or so.
As the markets got increasingly edgy over events in the US it emerged that the Swiss authorities had identified ‘accounting irregularities’ in the banks books. This coupled with the Saudi National Bank, the banks biggest sugar daddy, indicating that it wouldn’t be increasing it’s stake was enough to trigger a collapse in the banks share price and get it snapped up by it’s rival UBS for only €3 Billion.
What does the bank crisis all mean? Ireland 2023
Bank runs aren’t new, they are even movie staples, from It’s a Wonderful Life to Mary Poppins. Banks go belly up all the time.
Banks never have enough deposits to cover loans, that’s just how banking works. As a result they are fragile and completely dependent on the confidence of depositors.
The issue stalking the world of finance right now is fear and fear is contagious.
SVB and Credit Suisse were the canaries in the coal mine, indicating that rising interest rates might push the whole financial system over the edge.
What everyone is worried about now is that that fear will cause people to pull money and set off a financial death spiral.
There is another read on this however, SVB had a uniquely concentrated depositor base in a market that was uniquely deregulated by the Trump administration. Many believe if the Obama era regulation hadn’t been repealed the whole SVB debacle would have been avoided.
In this reading, Credit Suisse was famous, in fact infamous for its mis management. It was a zombie bank and only took a stiff breeze to blow it over.
In fact the swift action of governments and regulators, the US government guaranteeing all deposits and the Swiss forcing through the UBS takeover can be seen as evidence that they are in fact ready to do whatever it takes to prop up the banking system.
What does the bank crisis mean for me? Ireland 2023
Although the jury is still out, one thing seems certain. Inflation is going to stick around for a little while longer.
Inflation is the bogey man that haunts the Central Bankers. If inflation becomes ingrained then investors stop investing and the whole economy grinds to a halt.
This means Central Bank’s have a tricky path to tread on future interest rate rises, between financial catastrophe on one side and economic collapse on the other.
This backdrop is likely to result in a change of prescription for the sick economy, from a short sharp dose of interest rates to a gradual grind of sustained higher rates. Those hoping for a swift return to low interest rates, may have longer to wait than they bargained for.