Last week we welcomed a new generation of unwilling citizens to a new banking crisis with the shocking failure of Silicon Valley Bank.
It started sometime mid-last week when some clever clog heard of the impending failure of a financial transaction to raise capital for SVB to plug a big hole in its finances.
The big hole was created by something known as an asset-liability mismatch. SVB used a bulge of savers deposits that had accumulated over the past couple of years to purchase a lot of long-term treasury bills a few months back at a lower interest rate than todays.
In an era of inflation and rising interest rates, this created a growing problem for SVB.
The clever clog started withdrawing money from SVB business accounts.
This is the motive.
Career bankers raise a furrowed brow to find big holes in the finances. It gives bankers a bad name and makes them look like they don’t know what they are doing.
The 40-year-old SVB bank, it appears, did not have the historical memory muscle to manage its finances in times of inflation and rising interest rates. This was a craft of bygone eras of banking.
The Bank of New York, as an example, was founded by Alexander Hamilton 240 years ago, following the nasty inflation of 1776, into the inflation-free 1800s when the economy was tethered to gold, and on to the stubborn inflationary periods in the 20th century.
The Great Inflation from 1965 to 1982 was instrumental in honing the banking playbook that is still used in the 21st century. SVB was founded in 1983.
So, the clever clog phoned a friend, decanting the SVB crisis, and warning the friend to withdraw their money. The friend phoned another friend and soon, a network of friends who banked with SVB were receiving calls from credible friends warning them to get their money out.
Depositors started withdrawing their money from SVB in droves, creating a bank run.
This is the smoking gun.
SVB might have restructured its finances and survived, despite the failed transaction to raise new capital, but in the great confidence trick of money, the panic of the crowd was the starting gun that started a rapid acceleration of customer withdrawals.
Looming insolvency moved faster than the bank could keep up with.
By last Friday, the California Department of Financial Protection & Innovation appointed the Federal Deposit Insurance Corporation (FDIC) as receiver, SVB was closed for business, and market panic set in.
Phone calls, message apps, and video conferences jammed the digital channels. SVB customers, mainly tech businesses, had no access to their accounts, and many had payrolls to make, suppliers to pay, and stablecoins to reserve.
These are the innocent victims of the incident.
By design or fate, because it was Friday, and the market and the regulators are closed during the weekend, the downtime served as a speed bump, slowing things down. This is known in the financial services industry as a (market) circuit breaker.
Thankfully, level-headed thinking prevailed, and folks sped into action to attempt to work out solutions to the crisis.
This is the securing of the incident and the evidence by the authorities.
SVB, the 16th largest bank, is the second largest bank failure in U.S. history behind Washington Mutual in 2008.
A posse of folks from the regulators, the banking industry, and their advising firms, rode to the rescue while calls to help the innocent victims of the SVB crisis were matched with calls for letting SVB fail.
The finger-pointing started.
Leaders and luddites jammed the digital and social media channels with their versions of the truth accelerating the bombardment of narratives.
A loss of confidence in capitalism loomed, and finding a solution looked grim.
Some said, “It’s the Fed’s fault for raising interest rates so quickly after 40 years of next to zero rates.”
Others added, “It’s the regulator’s fault, why didn’t they act sooner.”
“It’s SVB’s fault, an accident waiting to happen with a concentration risk in high-risk tech companies and poor banking practices, they behaved more like a start-up than a bank,” said the I told you so’s.
“It’s the fault of lawmakers on Capitol Hill for the 2018 rollback of the post-Financial Crisis Dodd-Frank legislation removing capital adequacy tests by raising the threshold from $50 billion to $250 billion,” cried the technocrats.
“It’s the clever clog’s fault for starting a run on SVB,” added the conspiracy theorists.
On Sunday, another banking failure muddied the already muddy waters. New York’s Signature Bank had a run on its deposits, allegedly sparked by the run on SVB, and the New York Division of Financial Services took it over Sunday and gave control of it to the FDIC.
This is an accidental casualty in the incident.
Signature bank, a top 30 U.S. bank, was the third largest banking failure in U.S. history, behind SVB.
Financial contagion broke out, and concerns about a systematic risk to the banking system led the panic over Sunday brunch.
Later Sunday, the U.S. Government posse rode to the rescue and this banking crisis had a solution. All deposit accounts at both SVB and Signature Bank would be guaranteed, according to a joint statement released by the Federal Reserve, the Department of the Treasury and the FDIC.
Depositors would have access to their money on Monday morning, and the taxpayer would not be asked to foot the bill. The FDIC could start Monday opening to customers on a business-as-usual basis and could start the search for buyers of the banks’ assets.
Everything was fine again. The banking crisis was averted.
Customers of both banks slept better on Sunday night, with business customers breathing a sigh of relief knowing that they would not be wiped and out and that employees would get their paychecks, suppliers’ invoices would be settled, and reserves would be, well reserved for future redemption as required.
President Biden announced on Monday that “Americans can be rest assured that our banking system is safe, your deposits are safe.”
The problems were not contained to the U.S. banking system.
A U.K. posse had acted over the weekend to take the crisis into their own hands. U.K. fintechs customers of SVB’s U.K.s operating subsidiary had the same problems as U.S. customers.
After the Lehman Brothers collapse, when frankly, it appeared no one in the U.S. had considered the impact of the failure of Lehman’s on other jurisdictions outside of the U.S., the U.K. authorities were not going to let this happen again.
This is an unintended victim of the incident.
The Bank of England, His Majesty’s Treasury, bankers, lawyers, and industry associations worked furiously over the weekend to work out a solution.
The U.K. Prime Minister Rishi Sunak, a Stanford post-graduate and self-confessed techbro, who happened to be hanging out with President Biden in San Francisco on Sunday, was front-running communications that the problem has been solved in the U.K.
The Prime Minister announced on a LinkedIn post on Monday, that government had solved the problem by selling SVB’s U.K. business to the U.K. / Asian bank HSBC and that no taxpayer money is involved, and customer deposits have been protected.
Everything was fine again. A global crisis was averted.
By the end of Monday business, the narrative was running high, with great aplomb from both sides of the great divide.
There were cheers of support; that the strategic and economically important tech industry had been saved, in record time; the banking regulation system works under pressure; and, that lessons really had been learned from the 2008 Financial Crisis.
There were howls of protest: of further bank bailouts; this time to West Coast billionaires who are paid to deploy capital in the high-risk tech industry; of the failure again of the banking regulation system; and, that lessons had not been learned from the 2008 Financial Crisis.
U.S. Financial service sector leaders led the narrative.
Bill Ackman, founder of hedge fund Pershing Square Capital Management applauded the U.S. government’s emergency decision.
Hedge fund boss Ken Griffin of Citadel said the U.S government should have allowed SVB to go under as a “lesson in moral hazard.”
Bridgewater Associates founder Ray Dalio warned, “This bank failure is a ‘canary in the coal mine,’” adding it is an “early-sign dynamic that will have knock-on effects in the venture world and well beyond it.”
BlackRock chief executive Larry Fink raised the specter of a “slow rolling crisis” in the U.S. financial system following the failure of Silicon Valley Bank, “with more seizures and shutdowns coming.”
Policymakers were more pointed and focused.
Former congressman Barney Frank, said, “Digital currency was the new element entered into our system,” adding, “A new and destabilizing – potentially destabilizing – element is introduced into the financial system. What we get are three failures.”
Frank, the co-architect of the Dodd-Frank Act, which overhauled US banking regulation to prevent another global financial crisis is a board member of Signature bank defended the 2018 rollback saying, “Nobody has shown me any evidence of systemic or other kinds of fraud that would have been prevented.”
Tom Emmer, Republican Congressman for Minnesota, wrote a letter to the Chairman of the FDIC to express his concerns about the recent closures of digital asset and tech-centered banks like Silvergate, Signature Bank, and Silicon Valley Bank, declaring that “the FDIC is weaponizing recent instability in the banking sector to purge legal crypto activity from the U.S.”
On Tuesday, Federal Reserve Governor Michelle Bowman said, “The US banking system remains resilient and on a solid foundation, with strong capital and liquidity throughout the system,” adding, “The board continues to carefully monitor developments in financial markets and across the financial system.”
The E.U. Commissioner for Financial Services, Mairead McGuinness, signaled that the European Union banking sector is in “overall good shape” and there are “no immediate parallels” with the collapse of the SVB, in the bloc’s financial services.
McGuinness noted that the collapsed U.S. banks weren’t subject to the strictest regulatory requirements for liquidity like all E.U. banks with the Basel prudential standards because the U.S. does not apply these requirements to mid-sized and smaller banks (following the 2018 Dodd-Frank rollback).
By Wednesday, Credit Suisse, a Swiss Bank which had nothing to do with the SVB crisis, tech, or digital assets saw its shares lose 20 percent of their value as the bank’s largest investor ruled out providing it with any more capital. It should be noted that Switzerland is not in the European Union though is considered European by geography and culture.
This appears to be a separate incident unrelated to the original incident, though has some copycat attributes.
By Thursday Credit Suisse had arranged a $50 billion backstop with the Swiss National Bank just as shares in U.S. First Republic bank tanked following a downgrade to junk from S&P Global Ratings. Moody’s is reported to have prompted the failed SVB financing transaction, that ultimately led to the bank run.
This is a separate incident that appears unrelated to the original incident but is of interest to the authorities.
By Friday’s market opening, First Republic shares were down over 20 percent and Wall Street banks jumped in with $30 billion of deposits to help shore it up. This smacked a bit of the $3 billion bailout of Long Term Capital Management hedge fund by Wall Street banks in 1998, though this bailout was orchestrated by the New York Fed.
As markets closed Friday, SVBs parent company, SVB Financial Group was reported to have filed for Chapter 11 bankruptcy in a federal court in New York, and the day in still not over.
For many in the global banking sector, this has been the worst week since the collapse of Lehman Brothers on September the 15th 2008.
Seven days on we still don’t know who dunnit?
Who is ultimately responsible for what has happened in the past week and how will they be held accountable?
What we do know is that we have a new banking crisis on our hands.
While governments and the financial services industry remain vigilant, the panic stricken will continue to withdraw their savings from banks rumored to be going bust, and hedge fund analysts will scrutinize the finances of weak banks and short the weakest, creating more rumors.
This age-old part of capitalism is still functioning well.