By Peter Main
THE SERIES of bank collapses in mid-March raised the question of whether these were coincidental, isolated failures or symptoms of a wider malaise in the global banking system.
At first sight, Silicon Valley Bank (SVB) and Credit Suisse (CS) appear to be very different operations. The first was a relatively recent creation, specialising in finance and advice to the tech industry and effectively limited in its operations to California. The second, a long-established, solid institution in the world renowned Swiss financial system, was big enough to be reckoned systemically important not just in its home country but globally.
Even the speeds of their collapses were very different. While SVB appeared to get into difficulties only recently, CS was much closer to the classic description of how a business goes bust: gradually for a long time, then suddenly. Why then, did the Financial Times conclude that, ‘Rather than a blip, this episode could be a sign of things to come’?
The common factor in each of the collapses is the increase in interest rates as central banks like the US Federal Reserve or the Bank of England try to reduce inflation. The inflation itself was ultimately caused by the vast sums of money injected into economies after the financial crisis of 2008, made worse by the emergency funding in response to the pandemic.
After the financial crisis, many big companies opted to shift production to China, rather than invest in domestic production, and much of the new money went into the financial sector, stock markets, fine art and, more recently, crypto currencies. Prices rose, encouraging more money into those sectors and creating a huge pool of what Marxists call ‘fictitious capital’, that is, capital that does not represent productive capacity, goods or workforces.
Ownership of such capital is real enough, but it is held in expectation of future gains in its market price and that price is ultimately dependent on demand, unrelated to actual production. In that respect, it shares one feature with the banking system: the centrality of confidence.
At root, the entire banking system is one huge confidence trick. As long as a bank’s assets are profitable, its depositors remain confident that their money is safe in a bank, even earning a small rate of interest—so they leave it where it is, safe in the knowledge that they could, if they wanted, withdraw their money.
A bank’s assets, however, are not, as many people imagine, the deposits it holds. On the contrary, its assets are the loans it has made which also earn interest—at a higher rate, naturally, with only about 10 percent of deposits retained as instantly available funds. Clearly, if all depositors, or even a large minority, wanted their money at the same time, the bank could not pay up—it would be, literally, bankrupt.
In the case of SVB, collapse came as a result of earlier success. The tech sector in California was one of the few that saw real growth in the last decade and SVB was the ‘go to’ bank be-cause of its excellent links and contacts throughout that sector. New start-ups automatically banked with SVB and many were seriously profitable, especially in the first year or so of the pandemic as both businesses and consumers turned to IT applications.
The companies’ profits flowed into SVB on such a scale that they could not be loaned out again. Instead, the bank bought long-dated Treasury bonds, generally the safest investment because they are backed by the Federal Reserve itself. That security, however, was undermined by the pandemic. Around the world, governments injected billions to prop up whole industries, funds unmatched by any production. As inflation rose, the Fed began to raise interest rates and that had two disastrous consequences for SVB.
Higher prices, plus higher interest rates, meant higher costs for the bank’s depositors, who began to withdraw funds. At the same time, the drawback of long-dated bonds became evident: they could only be redeemed at face value at maturity, say, ten years. Any earlier and they could only be redeemed for what the market was prepared to pay – and as more bonds were offered for sale, their price went down.
As depositors got wind of this, more and more decided to withdraw their funds, no longer confident they would be there next week, or even the next day. On one day, Friday, 10 March, $42 billion was withdrawn. At that point, the Fed moved in and closed the bank—guaranteeing all depositors their money although many had more deposited than would normally be covered by deposit insurance.
Like many others in the USA, SVB was essentially a regional bank but, nonetheless, it was the 16th biggest in the country and its collapse shook confidence far beyond California. On the other side of the continent, the Signature Bank in New York also faced a run and collapsed.
Coming so close after SVB, Signature’s collapse rang alarm bells around the world and nowhere more loudly than in Switzerland. The legendary reputation of Swiss banks as the most stable of all has taken a number of knocks in recent years. In 2008, UBS, the biggest, had to be bailed out by the state. More recently, a series of bad deals and legal challenges had tarnished the image of Credit Suisse, the second biggest. Last October, a social media rumour led to a run that saw $111bn withdrawn and over the year it made a loss of $7.6bn.
The combination of falling share price and the SVB collapse saw confidence evaporate. The following week, deposits were being withdrawn at the rate of $10 bn per day. That could not be sustained, and CS approached both the state authorities and its shareholders for extra funds. The decisive blow came on Wednesday, 15 March, when the Saudi National Bank, a major share-holder, declared publicly that it would no longer provide backing.
Within hours, the Swiss Central Bank intervened with $54bn to save CS from collapse. Knowing that the bank’s assets were insufficient to cover its liabilities, it instructed UBS to arrange an immediate purchase, to be completed before opening for business on Monday 20 March. UBS had to comply but drove a hard bargain, paying just $3.5bn for all CS’s assets and insisting on the write-off of a whole class of ‘Tier 1’ bonds with a face value of $17bn.
That write-off, intended to help secure the Swiss banking system, inevitably has destabilising effects elsewhere. Those bonds were no doubt used as collateral against further borrowings and investments, which are now put in question. Such knock-on effects make clear both the inter-connectedness of the world economy and the centrality of the banks, and other financial institutions, to the whole of humanity.
That is why, across the globe, expropriation of the banks and workers’ control over their assets has to be a central demand of any socialist party worthy of the name.