Earlier this week, banking shares fell rapidly – not only in the US, and not just for regional banks, but all over the world – in the aftermath of the collapse of SVB Financial and Signature over the weekend. What caused their collapse? And are there wider implications?
One of the things that triggered the implosion 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 ill-fated crypto investor FTX, SVB wasn’t gambling with their depositors money. Instead, it was investing deposits in a manner that would have seemed like the height of responsibility 18 months ago: in US government bonds.
But when the Federal Reserve started raising interest rates, the value of the bonds went down (since bonds with a higher interest could now be obtained on the open market).
Tech in trouble
At the same time, SVB was specialising in lending to technology companies. They have taken a hit recently, leading to mass layoffs and withdrawals from their bank accounts, as mounting losses forced companies to 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, the prices of which are 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 last week. Uninsured debtors 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 that 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 for startups, who wouldn’t be able to pay wages and bills as long as their accounts remained frozen. This 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 on Monday, 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).
The Fed will provide banks and tech companies facing liquidity problems with cheap cash. In effect, they are once again engaging in Quantitative Easing (QE) and in another bailout, even if they are forcing shareholders to take a hit.
Ironically, much of the tech sector is fond of libertarian ideas about the ‘free’ market. But 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 of their stock as they could early last week, in order to make sure that they weren’t caught out.
Any of the fines that President Joe Biden has threatened to impose on them would, in all likelihood, be dwarfed by the money they have saved from these sales.
Nonetheless, over the last week, anyone sitting with a large bank deposit anywhere in the world would have started to worry about the safety of their money. It is a serious blow to the trust in the banking sector, raising the risk of further bank crises.
Multinational investment bank Credit Suisse has already wobbled in the wake of the SVB collapse. To calm nerves, earlier this week, the Swiss-based banking giant had to secure a £45 billion lifeline from the country’s central bank. And there are fears that further weakness in the global financial system will be revealed in the days and months ahead.
Speculation and inflation
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.
These include, as one Rabobank analyst put it: “Venture capitalists funding Instagram filters that make cats look like dogs.” But it also includes, 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 this, 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. Last 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.
Crisis and class struggle
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 is now possible that this may not happen.
In the autumn, central bankers were insisting that they would not stray from their path of lowering inflation, no matter 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 tame inflation.
It is also 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 wave of bailouts.
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.