What a week it’s been for the banking sector.
Sky news calling this a social media driven run
The 40 year environment of declining interest rates is over and the financial bubble it has created is in grave danger of popping. Will central banks hasten a return to QE and low rates, or is it completely out of their hands, as the forces of the market return to the fore.
Is it fair to say that interest rates are now being driven by contracting bank credit?
For many banks and businesses simply rolling over previous loans requires new borrowing. This is now much more expensive, but the demand for money is just as high. This is only going to push rates higher, but also lead to an increase in loans going bad.
As predicted the central banks are choosing to rescue the banking sector with bailouts. The cost will be higher inflation and then the death of fiat currency. This week the Fed has poured $300 billion into the banking system which is more than in 2008.
Last Friday this became the second largest US bank failure. A quarter, or $42 bn of SVB’s deposits were drained in hours, leaving it negative $1 bn in cash.
It was considered the backbone of start-ups and venture-capital firms in Silicon valley. Images of people lining up to get their money out was reminiscent of a run on the UK bank Northern Rock in September 2007 leading to it’s nationalisation. This was a clear indicator all was not well in the banking sector and culminated in the 2008 financial crisis.
In an article on Wall Street on Parade they describe SVB as a Wall Street IPO machine – padding the accounts of venture capital and private equity middleman. Pouring money into start-ups and making them millionaires, before the company and their idea flamed out.
An inherently risky bank which then put the extra cash these activities generated and invested heavily in bonds. However, in an environment of rising interest rates the value of the bonds already out there were reduced. Just like a see-saw with interest rates on one end and bond yields on the other. As one went up, the other went down.
The irony is that the CEO of SVB was also a serving member of the San Francisco Fed who were carrying out the interest rate rises which were putting the nails in the coffin of this bank. However, as of the Friday when the bank collapsed the CEO Greg Becker was no longer on the SF Fed’s board following a hasty removal.
Greg Becker |
Of further interest is that in February Greg Becker sold 11% of his shares in SVB. Also in February Michael Zucker (General Counsel) sold 19% of his shares; Daniel Beck (CFO) sold 32% and Michelle Draper (CMO) sold 25%. Rats fleeing a sinking ship?
The bank had had a secret bailout last year by the Federal Home loan bank of San Francisco which poured $15 bn into SVB at the end of December. The same amount was recorded as unrealised losses in mid-January. Even still, the bank passed it’s stress test and for the ordinary person with their money in the bank everything appeared fine.
Forced to attract more investment it was when SVB tried to raise capital that it sparked a failure of confidence.
Since the 2008 financial crisis unprecedented financial steps have been taken; bail-outs, asset purchases, quantitative easing (money printing), and ultra low interest rates. Sooner or later the chickens were going to come home to roost.
We are now an impressive 14 and a half years since the last great crisis was upon us. Historically speaking these cycles in capital markets occur roughly every decade. We were well overdue one, and the fear is that the longer it’s been, the worse it’s going to be when the inevitable comes due.
Not to worry President Biden has it all in hand.
The SVB failure revealed bond holdings with longer maturities than is usual. These were taken out at a time when short term bonds were quite simply not worth it and longer term bonds attracted a much better rate. It was a bet that interest rates would remain low for ever.
Rising rates has turned all those bets into big losses for the banks who made them.
Following the collapse of SVB two other Californian banks followed suit. Signature and Silvergate, both involved in lending to tech companies and in the crypto sphere. Some could argue that the root of this particular crisis can also be found in the collapse of FTX and the spill over effect. We can see the interconnectedness as other regional banks fell under pressure.
On Monday last in the UK, Barclays, Lloyds and the Bank of London have all been asked by the Bank of England to put together a rescue plan for SVB (UK) to arranged by the Rothschild bank. By Thursday the bank had been taken over by HSBC who paid a £1 for the company.
Even as the ailing Credit Suisse has had to receive a bail out from the Swiss National Bank worth $44bn. This has helped stabilise the markets for now.
US banks are now in talks to rescue First Republic. JPMorgan, Citigroup, Bank of America and Wells Fargo are said to be working on a deal to save the regional bank, which had seen its share price fall by 80% in the space of a week. Just yesterday Wall Street banks deposited $30 bn in First Republic, but still it’s share price fell 24%.
The bail-ins that has been promised in which;
taxpayers would no longer pay the price of banker greed and their failure.
Have been abandoned in the US, UK and Europe. We can only suspect that the Japanese will follow accordingly.
14 years of interest rate suppression have led to a situation in which it’s become part of the scenery. Our societies on many levels have shaped themselves round this reality. Even for the ordinary person saving was punished by little to no return on your money. It encouraged everyone to be a borrower.
In the US mortgage terms are typically for 30 years. Meaning the banks are now carrying debt obligations that are now well below market valuations. It's no surprise that Moody's have downgraded the entire US banking system.
In the UK mortgages are much shorter, 2 and 5 year are common. In this scenario defaults by homeowners are more likely, although I think mortgages will be moved to interest only instead. Always the short term fix. They’ll certainly have less money to spend into the economy if a greater portion goes to paying their mortgage.
Whilst in Europe and Japan the banks have long been dealing with negative interest rates which has actually discouraged lending altogether.
Those following economics may remember that things were not going well when the Fed tried to reverse QE back in 2019. Thankfully, (for the banking system), along came a plandemic and the need to inject huge amounts of money into the global economy.
This current banking crisis raises the spectre of other questions;
The question of risky investments, or mal-investments and the role of rampant criminality throughout the banking system who has been given, in effect, free money for over a decade. In a casino environment in which if you lose you will get bailed out, no questions asked.
The role of social media in precipitating a bank run and whether censorship should be applied to prevent social contagion.
The introduction of Central Bank Digital Currencies (CBDCs), as the solution to bank runs and to inject some stability back into, what looks set to be, an unstable environment.
Now governments are even more indebted. Interest rates are rising. Banks are collapsing. Even central banks are technically insolvent. They will save the banking system, but the cost will be surging inflation and the death of the currency.
JP Morgan says the Fed could inject $2 trn into banking system
