Bankroll or bank rolling?

By Rafaella Spanou

It has not been easy for American banks the last couple of weeks. What started out as a shock with the collapse of Silicon Valley Bank on March 10, quickly turned into a landslide that took other banks with it. Signature Bank and Credit Suisse soon followed, while First Republic Bank of San Francisco is barely hanging in there.

Of course, Central Banks, the Federal Reserve and other factors came to the rescue, multi-billion deals were signed and the Earth still keeps turning; but let’s break down the what, the how and the why.

The aforementioned banks are not the average person’s go-to for transactions so why should we care? Well, experts describe this as the biggest collapse since 2008. And what followed 2008 has left the world still reeling from it: the global financial crisis.

THE WHAT:

Silicon Valley Bank (SVB) & Signature Bank

The US-based banks that faced destruction first (10/3 and 12/3 respectively) are now subject to a bidding contest by the Federal Deposit Insurance Corporation, with First Citizens and The Raleigh being among the first bidders for SVB, according to Business Today. It is worth noting that British giant, HSBC, bought SVB’s UK branch for the symbolic amount of £1.

Credit Suisse

One of the thirty pinnacles of the global economy and based in Switzerland, Credit Suisse was in trouble. With its shares dropping significantly within days, banking rival UBS and the Swiss government rushed to salvage whatever they could, according to reports on CNBC and Al Jazeera. UBS closed the deal on March 19th to buy out Credit Suisse for $3.2 billion, with an additional support of $108 billion from the Swiss Central Bank.

First Republic

Another American bank facing a similar fate, only this time, the ‘big guns’ came to the rescue. According to CNN, 5 of the biggest US Banks, including JPMorgan Chase, are pumping First Republic with $30 billion to protect it.

THE HOW AND WHY

Economics Professor Shivam Agarwal of Maynooth University explained to Thecity.ie why this is happening. 

“For banks, public deposits are liabilities and loans are assets. Some banks, in particular, had a huge growth in their deposits during and post covid, i.e. increase in liabilities. However, the banks could not lend out at the same pace. They, therefore, put a lot of this cash into government securities. As long as, the interest rates were going down, they made money using this strategy”, says Prof Agarwal.

Central Banks across the world had to increase the interest rates to counteract inflation.“Since the banks invested money into these securities, at low yields, an increase in yield meant they started losing money continuously. The banks were caught off-guard as they had not hedged their positions to protect themselves against this loss. This, combined with SVB selling nearly all their available-for-sale securities at a loss of 1.8 billion USD, triggered a bank run, which meant, that the bank now needed to further liquidate to keep up with the reimbursement.”

REPERCUSSIONS

Prof Agarwal explains: “Banks and everyone else are now realizing the perils of the combination of increasing borrowing and low-interest rates environment. In the short term, it will put significant pressure on the central bankers to reduce the interest rate rise. In the long-term, in the US and everywhere else, they will reassess the stress tests not only for systemically important banks (SIB), but perhaps widen the net to include non-SIBs too.”

WHAT’S NEXT?

“In the near term, we will see its spill-over effects not only in the US but across the world. Investors moving quickly to identify the weaker banks and short them. The regulators are moving to ringfence and protect the interests of the depositors as their first move. The long-term implication would be to move away from the unconventional monetary policies which keep interest rates superficially low. This will allow us to understand the dynamics and implications of such moves and will strengthen the system to prevent future similar situations,” said Prof Agarwal.

It may have been a tumultuous couple of weeks, but it certainly wasn’t out of the blue. As the Financial Times reminded us, after the disastrous UK mini-budget of aytumn 2022 by then prime minister Liz Truss and Chancellor Kwasi Kwarteng, the UK pension market would have collapsed, had the Bank of England not intervened. As Prof Agarwal commented: “This is a vicious cycle which could have only been halted by the regulator stepping in, which is playing out now.”

A study mentioned in Business Today warns that 186 more banks in the USA are in danger of falling down the same rabbit hole, if the government doesn’t devise a plan to intervene and salvage what’s left.

Are we on the verge of another crisis or is the banking system strong enough to handle this?

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