The specter of Lehman Brothers is once again lurking in the markets. Fifteen years after the collapse of the US lender triggered a global economic recession, a new banking crisis has unfolded with frightening speed.
In recent days, lifeboats have been launched on both sides of the Atlantic to rescue the stricken banks. It follows the sudden collapse of Silicon Valley Bank, the 16th largest in the United States, after a classic banking run that saw depositors withdraw cash in droves.
The UK branch of Silicon Valley Bank, a lender to thousands of tech companies, has been taken over by banking giant HSBC for £1.
As panic spread, two smaller US lenders – Signature and Silvergate – were also shuttered, before San Francisco-based First Republic was bailed out by a group of Wall Street banks as part of a bailout of £25 billion.
But it was the fate of Credit Suisse – a much larger bank considered “systemically important” to the global financial system – that overshadowed everything.
Redundant: UK staff leaving Lehman Brothers in autumn 2008
Credit Suisse, Switzerland’s second-largest bank, saw its share price fall to new lows as fears of contagion mounted, despite Swiss authorities throwing the lender a 45% lifeline. billion pounds. It is now on sale.
Nouriel Roubini – the economics guru nicknamed “Dr Doom” for predicting the 2008 crash – called the Credit Suisse situation a “Lehman moment” for global markets. That the chairman of Credit Suisse is Axel Lehmann (no relation) invited parallels. But that’s where the similarities end, experts say. Unlike 2008, this crisis of nervousness did not start in the United States, but in the rapid rise in global interest rates to combat inflation fueled by soaring energy prices.
Investors have dumped supposedly ‘safe’ government bonds – or IOUs – as a series of central bank rate hikes offer better yields. This has eroded the value of the bond holdings of the big banks, which use them to offset “riskier” investments.
The first sign that all was not well came in the autumn when UK pension funds were forced to sell off Treasury bills – or gilts – after ex-Chancellor Kwasi Kwarteng’s disastrous mini-budget. The sale revealed huge amounts of borrowing previously hidden in the pension system. The ship was only stabilized when the Bank of England stepped in with a £19billion bailout.
How safe are our banks? Rules introduced in the wake of the last crisis aimed to make them more shock-resistant and prevent more taxpayer-funded bailouts. Banks around the world have been building up cushions of capital – rainy day money – to absorb losses, either on failed loans if the economy crashes or on bad bets like government bonds. State. But under the Trump administration, those rules have been watered down for regional lenders like Silicon Valley Bank and First Republic.
Dr Doom: Nouriel Roubini foresaw the 2008 crisis
Former Bank of England Deputy Governor Paul Tucker warned US officials in 2019 that easing funding requirements would end in tears. As US banks begged for bailouts, he told the Mail on Sunday: ‘No one cares about stability until they cry out for help.’ Sir John Vickers – former chief economist at the Bank of England and architect of UK banking reform – thinks UK lenders need more capital in their funding structure.
Analysis by The Mail on Sunday has found that the ‘big four’ banks – Lloyds, NatWest HSBC and Barclays – slashed their capital cushions last year as they flooded shareholders with billions of pounds in dividends, buyouts of actions – and, of course, showered themselves with exceptional bonuses.
The big banks have collectively made £40bn in 2022 in net interest income – the difference between what they charge borrowers and what they pay savers. This angered depositors, but also bolstered the soundness of banks. Chancellor Jeremy Hunt said last week: “UK banks are well placed to deal with this volatility. The wider UK banking system remains safe, sound and well capitalised. What happens next depends on how regulators and policymakers react. Central banks are caught between a rock and a hard place, analysts say.
“They’re still super nervous about high inflation, but further rate hikes risk causing further financial instability,” said Susannah Streeter of Hargreaves Lansdown. Others urge not to overreact.
“Now is not the time to increase regulation,” said Tim Congdon of the Institute for International Monetary Research. “If anything, capital requirements should be relaxed.”
Central banks should lend to banks that are “substantially solvent”, he added. “The last thing we want is a replay of 2007-8. When banks were forced to hold more capital, they stopped lending and the global economy was plunged into recession.
Ultimately, banks depend on trust for their very existence. Credit rating agency Moody’s said in a recent note to clients: “When confidence is shaken, contagion can be rapid.”
“Bank balance sheets are often complex and opaque, with linkages and exposures that are often only known after the fact.”
The inflationary shock and rapid increases in interest rates are likely “to have further consequences for the financial sector”, he concluded.
In other words, expect more moments of distress on the choppy seas of high finance. It shouldn’t be necessary to jump overboard, but keep a life jacket handy just in case.
We MUST go back to old school banking stocks, says DAVE FISHWICK
Here we go again ! : Dave Fishwick, van salesman turned millionaire and founder of the Bank of Dave
Oh no, here we go again! I woke up at the start of the week to hear that one lender – Silicon Valley Bank UK – had been sold for £1.
If I had known they were selling banks so cheap I could have saved millions of pounds and ten years of my life. And I would have doubled the offer to £2.
The week ended with another lender, Credit Suisse, getting its hands on a £45 billion lifeline from the Swiss central bank.
Banks were supposed to be fireproof after the financial crash of 2008 when we as taxpayers had to bail them out. So how the hell did we end up in the middle of another banking crisis?
In my opinion, we need tighter control of the big commercial banks to avoid further collapses and to change the culture of bonuses.
But such regulation and legislation must be proportionate, so that smaller banks – like my Burnley Savings and Loans, aka ‘The Bank of Dave’ – are not locked into endless bureaucracy and bureaucracy.
Fundamentally, we need more competition from smaller, simpler community lenders who can become the safe and healthy banks of the future. Without real competition, the big banks continue to serve us poorly. As they continue to close hundreds of branches each year, great employees are lost.
The personal touch is gone, and the vital local knowledge and understanding of a community is threatened. How can a head office 300 miles away choose a florist business in Accrington without knowing the area or the people involved? Where does it all end?
Well, I was delighted that the Prime Minister spoke so positively in Parliament this month about Burnley Savings and Loans and the need for more community banking. We’ve lent over £30million to thousands of people and businesses in the UK, helped savers get the best interest rate on the high street and donated all our profits to charity.
And, unlike traditional banks, we have done so without taking any furlough money, proving beyond doubt that we are fit and proper people to run a financial institution.
Of course I would say that, but we really need to make sure there can be more Bank of Daves!
The award-winning documentary series Bank Of Dave has been remastered by Netflix and will stream on the platform from Friday.
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