Bond risks must be tamed: there must be a suspicion that the post-financial crisis system is not as robust as we thought, says ALEX BRUMMER
The immediate market fallout from the collapse of Silicon Valley Bank subsided as stocks of second-line US regional lenders rebounded.
But it is a tsunami that has not yet calmed down.
The flight to safety on both sides of the pond continues with a weakened Credit Suisse the biggest victim of the malaise in Europe.
The immediate market fallout from the Silicon Valley Bank collapse has eased as stocks of second-line US regional lenders rebound
A shroud of secrecy has fallen over how the bankruptcy of SVB affects Britain’s challenger banks.
Those of us who remember how the dominoes fell one by one during the Great Financial Crisis, despite management’s protestations that all was well, must view these statements with skepticism.
Potentially misleading answers are once again coming from less established banks.
SVB’s London branch may have been a specialist lender, but it’s hard to think that businesses and individuals with uninsured deposits elsewhere won’t seek to protect their cash reserves or hard-earned savings.
At some point, the second shoe will fall given that so far UK authorities have not followed their US counterparts in erecting a safety net.
There must be a suspicion, as we learned from the liability-driven investing (LDI) scandal of 2022, that the post-financial-crisis system is not as robust as we thought.
The former chief economist of the Bank of England, Sir John Vickers, is clear on this.
He argues that banks need more capital in their funding structure. The Bank and regulators need to apply more disciplined and transparent stress tests.
The inadequacy was true for LDIs and may well be the case for challenger banks and fintech lenders.
Indeed, when the big banks made big profits for 2022 thanks to healthy interest rate margins, no one wondered how wise it was to distribute so much money to shareholders in the form of dividends and managers in the form of bonuses.
Despite September’s flip-flop in gilt prices, no one suggested that capital requirements should be adjusted to hedge against higher risks for government bonds at a time when official interest rates and of the market increase.
Banks and bond markets have generally weathered the difficulties of the post-2008 era well, including the shock of the Covid-19 shutdown and the war in Ukraine and its inflationary fallout.
There were scary moments.
As the pandemic swept the world, US bond markets were in chaos and it took coordinated interest rate cuts, huge amounts of money printing (quantitative easing) and swap deals between banks. central to calming things down.
This was an early ignored warning of how failed bond markets can ruin stability.
The rich are different
On the other side of the Atlantic, the rescue of the SVBs and the banks provokes a political storm. The US Department of Justice and SEC’s decision to launch investigations into the behavior of the bank’s chief executive, Greg Becker, and the company’s chief financial officer, Daniel Beck – as they rushed to sell shares when the bank was on the verge of collapse – seems serious.
American financial justice is accustomed to acting quickly and harshly in the face of alleged wrongdoing. The schism goes much further than that.
U.S. Senator Elizabeth Warren, a former Democratic presidential candidate, has demanded that Fed Chairman Jay Powell withdraw from any investigation because he participated in 2018 reforms that relaxed regulatory requirements for regional lenders.
The Wall Street Journal weighed in on the debate accusing President Biden of “talking whoppers” when he addressed the nation on Monday.
He disputed Biden’s assertion that “no loss will be borne by the taxpayers,” noting that bank insurance funds were never intended to compensate for losses on deposits over $250,000.
The idea is that the wealthiest depositors, looking for high returns, do not deserve a bailout. As was the case during the Great Financial Crisis, ordinary citizens are being asked to bail out the rich in the name of systemic risk.
In case no one noticed, the annual consumer price index in the United States slowed to 6%, from 6.4% in February, after peaking at 9.1 in June 2022.
There are still pockets of rising prices, as anyone who has tried to book a hotel in the United States can attest.
Nonetheless, the drop in the headline inflation rate would be an excuse for the Fed to take its foot off the rate accelerator as the financial sector sails against SVB aftershocks.