It was poet and failed experimental scientist Percy Shelley who noted that: “history is a cyclical poem written by Time upon the memories of man.” The nods to history repeating itself get old quickly if the failures of the past seem to occur on a weekly basis in real time, but that doesn’t mean we can simply ignore these sentiments. As the financial crises of our lifetime have shown, they always start small but then explode outward with force, volatility and real consequences for everyone from the ordinary banker to the lowly budding student entrepreneur to the casual retail investor.
Silicon Valley Bank, otherwise known as SVB was, until Friday 10 March 2023, the 16th largest bank in the US. SVB was worth around $200bn before it collapsed in a sudden rush of deposit withdrawals over one weekend, with panic over the economy’s rising rates consuming the minds of the Bank’s executives and its clientele jointly. This led to the intervention of the Federal Deposit Insurance Corporation, the US agency responsible for acting as receiver in post-bank failure situations. The surprising immediacy of the bank’s failure not only sent ripples through the US banking and financial sectors, but also forced regulators to close Signature Bank, which operated out of New York because of what is known as the “contagion effect.” As the name suggests, this is when the failures or disturbances of other financial institutions ripple to affect other entities operating in the same space or the entire system as a whole.
“SVB’s noteworthy status comes from its location and its borrowers.”
SVB’s noteworthy status comes from its location and its borrowers. As a regional bank, it focused its clientele largely on the Big Tech sector that has traditionally thrived in the Silicon Valley area of San Francisco. Despite the bank having in excess of hundreds of millions of dollars for tech clients, most outside of California up until its collapse wouldn’t have heard of SVB, including myself. As most of us are accustomed to a relatively small banking sector, consisting of oligarchic control by the likes of AIB and Bank of Ireland, the very idea of regional banks, let alone those dedicated to specific sectors, is a completely foreign notion. Its news-grabbing failures can provide us with lessons, but also unfortunate reminders of how fragile certain banking architectures really are.
In a basic sense, SVB took big risks, hedging millions on long-term US Government bonds – for those who don’t have the fortunate pleasure of learning about finance (or watching The Big Short), bonds are sums of money you lend to the government, who in turn agree to pay you back, plus interest. These longer-term bonds, some stretching ten years, were bought at a time when the Federal interest rate was flat, yet the Federal Reserve, the US’s Central Bank, kept increasing rates all throughout 2022 to curb growing inflation, thus harming those older bonds whose price (and therefore value) is tied directly to this rate.
The spike in interest rates, combined with the panic of said rates rising, caused many of SVB’s clients to come knocking, demanding their money be withdrawn. Hedging all your eggs in one basket, in one sense or the other, is never a good idea in banking. The lack of financial variety in its clientele meant depositors were pulling millions and even tens of millions from the bank’s sheets. In one day alone the bank suffered a $41bn bank run. A death knell even for most major banks, and certainly for SVB.
After the financial crisis of 2008, the Dodd-Frank reforms were enacted, bringing much needed preparation and risk-planning mandates to America’s biggest banks, those with more than $50bn in assets. Where were these regimes, then, in SVB’s case? They didn’t apply. Yes, this Act, despite the calamitous nature of the ‘08 crash, was watered down by legislators, giving in to medium-sized banks’ whines of harsh regulation. The day before its closure, SVB was panicking, trying to recapitalise. It shot itself in the foot, and the blame should not fall wholly on Congress. By locking away billions in long-term bonds, SVB doomed itself should any extremely volatile bank run come knocking. And it did. These legislative changes have crippled an entire class of banks in America who, because of the pandemic, expanded their deposit base and brought in a plentiful horde of capital, yet didn’t follow the basics of fractional reserve banking. Always keep some for emergencies. This isn’t a story about risk, it’s a tale of incompetent handling of assets.
“The potential knock-on effects of SVB’s collapse have already started.”
The potential knock-on effects of SVB’s collapse have already started. The share price of banks similar in size to SVB, such as First Republic, another Bay Area-based bank, have continued to plunge, taking as much as an 80% nosedive. If trading sessions at the New York Stock Exchange have needed to be halted for 10 continuous days due to the volatility of your share price, then something is definitely not right.
It is not a coincidence that this side of the Atlantic is feeling the panic too. Following on from the chaos in North America, the spread of fear in the system led many heavy-hitters in European banking to suffer similar share price declines. Banking is at its core a system of trust and confidence, and with fraying trust comes the self-interest and self-preservation of one’s own finances, more than anything else. Credit Suisse, the notable Swiss banking giant, who at their core tailor to wealthy clientele in the realm of wealth management and provide secondary investment services, suffered a slower but more systematically impactful downfall.
The ripple effect was in full swing, and Credit Suisse saw the full force of the tidal wave. In an extraordinary move, the Swiss bank’s collapse wiped out what are known as AT1 bonds, which act in financial terms as shock absorbers, ready and waiting in the wings to reduce the blow to depositors, investors and the bank itself in the event of a crash. The wiping out of this particular kind of financing deepened the hole that UBS, Credit Suisse’s main rival, had to dig its number one enemy out of. The banks literally operate across the road from one another in Zurich. If Costa on College Green were to suddenly collapse, it would be like if Starbucks next door got all of their unused coffee beans.
The headline that is floating around is that in this one instance, history might not repeat itself, but it does rhyme quite poetically. The federal government in the US is assessing a bailout option of SVB which, as Ireland knows, never leads to content customers. Making losses public while maintaining private profits would in essence cement the growing fear that not just some, like JP Morgan or Bank of America, but all banks in America are too big to fail. This reluctance to let the rich eat their own losses shows clear as day how dependent the US, and to some extent most major developed nations, are on their private enterprise. If a bank so specialised in its services and its loans can trigger the collapse of the banking system, we are and have been, contrary to relative calm in recent years, treading on mighty thin ice. What’s worse is that we will continue to do so for quite some time.
