This morning, banking shares fell rapidly – not only in the US and not just regional banks, but all over the world – in the aftermath of the collapse of US regional banks, SVB Financial and Signature over the weekend. What caused their collapse and are there wider implications?
One of the things that triggered the collapse of Silicon Valley Bank (SVB) is the sustained rise in interest rates. In the period of ultra-low interest rates (a policy adopted to deal with the 2008 recession), banks borrowed massively through the purchase of secure government bonds.
Unlike the collapsed crypto investor, FTX, the SVB wasn’t gambling with their depositors money. It was investing its depositors' money in a manner that would have seemed like the height of responsibility 18 months ago: US government bonds. But when the Federal Reserve started raising interest rates, the value of the bonds went down (as bonds with a higher interest could now be gotten on the open market).
At the same time, SVB was a bank specialising in lending to technology companies. They have taken a hit recently, leading to mass lay-offs and withdrawals from their bank balances, as losses made companies eat into reserves. In addition, higher interest rates made borrowing money more difficult and less attractive as an option.
Some tech companies started withdrawing money last year, forcing banks like SVB to find the cash to pay them by selling bonds, whose price is now lower. This led SVB to attempt to raise capital by issuing new shares, which highlighted the difficulties they were in.
This triggered a classic bank run. Depositors, particularly those having deposits over the maximum federal guarantee of $250,000, asked to withdraw $42 billion on Thursday. Uninsured depositors represent a very high percentage in the case of SVB, much more than is the case in a ‘normal’ bank. It was the final nail in the coffin.
Fearing the political consequences, the US government attempted to avoid a bailout, saying they would not offer any guarantees beyond the $250,000. However, this quickly generalised the problem, causing depositors to withdraw money from other small banks. It also became clear that this would spell disaster for a large part of the tech industry in the US, particularly startups, who wouldn’t be able to pay wages and bills as long as their accounts remained frozen and it would have forced a round of closures and layoffs. Reportedly, a quarter of a million workers are employed in companies that banked with SVB.
So, the Federal Reserve and the government were forced into a panicked U-turn to contain the fallout. Before markets opened today, the Federal Reserve announced that it would guarantee the depositors in whole (i.e. including those deposits above the $250,000 threshold), and that this would be paid for by a levy on other banks (i.e. not by the taxpayer).
It will provide banks and tech companies facing liquidity problems with cheap cash. Thus, they are effectively once again engaging in Quantitative Easing (QE), and another bailout, even if they are forcing shareholders to take a hit. Ironically, much of the tech sector is fond of libertarian ideas of the free market, and this is really a rescue package for that sector. Once again, as the Financial Times put it, they are effectively carrying out the “privatisation of profits and the socialisation of losses”.
The UK arm of SVB was bailed out by HSBC, who very generously paid £1 to purchase the entire bank. Other investors were also hoping to be able to step in and grab a bargain in the fire sale of SVB’s assets that would have taken place, had the Fed not stepped in. The executives of SVB, of course, took the opportunity to sell as much SVB stock as they could early last week to make sure they weren’t caught out. Any of the fines Biden has threatened to impose on them would, in all likelihood, be dwarfed by the money they saved from those sales.
Nonetheless, over the weekend, anyone sitting with a large bank deposit anywhere in the world will start to worry about the safety of their money. It is a serious blow to the trust in the banking sector and raises the risk of further bank crises.
There are other, more systemic, factors at play. For a whole period, QE injected enormous amounts of cheap money into the economy, money which in the main did not find a productive avenue for investment. Instead, it found its way into all kinds of speculative investments, including, as one Rabobank analyst put it, “venture capitalists funding Instagram filters that make cats look like dogs”. But also, of course, real estate, which is a particular problem in China.
After having massively expanded their QE programmes, and having given out massive handouts during the pandemic, the cheap money eventually emerged as inflation. In order to control it, central banks sharply reversed their policies with quick interest rate increases. They were, and still are, trying to provoke a recession to curb inflation. However, as this case shows, they are not really prepared to face the consequences.
There is a genuine risk that the massive amounts of debt accumulated across the world in the past 30-40 years will mean that interest rate hikes will not just provoke a small recession but a full-blown depression. A strategist at Deutsche Bank is quoted in the Financial Times saying:
“We’ve learnt two things over the last few days. First, that this monetary policy tightening cycle is operating with a lag, like every other. Second, that this tightening cycle will now be amplified due to stress in the US banking system.”
Very much so. On Sunday, a bank called Signature, which had gotten heavily involved in cryptocurrency, was forced to close, and other banks are under pressure to show that they can survive.
As late as last week, the Fed said they would raise interest rates by at least 0.25 percentage points at their next meeting, but it now looks like that will not happen. In the autumn, they were insisting that they would not stray from their path of lowering inflation, never mind the consequences. Now, faced with the first serious impact of their rate rises, it seems that the Federal Reserve has blinked. This does not bode well for their ability to control inflation.
At the same time, inflation is a main factor in the revival of the industrial struggle, for instance in Britain, to levels unseen in 30 years. It is noticeable that Biden has said the taxpayer will not pay for the bailout of SVB’s depositors (tech companies in the main). They need to factor in the burning anger against the capitalists and bankers that has persisted since the post-2008 bailout.
The ruling class is caught between a rock and a hard place. Whatever they do is wrong. The whole equilibrium of the capitalist system has been disrupted, and every solution that the ruling class comes up with merely creates equal or bigger problems elsewhere. The financial crisis is not the cause of the capitalist crisis, but a symptom of it, and it will be followed by more.