This banking crisis is very different to 2008 - let's hope for calm before too long
20 March 2023, 07:46
Fifteen years ago, few will forget the lengthy queues that formed outside many branches of Northern Rock. The global banking crisis, precipitated by sub-prime lending in the US, was ‘under a wet sail!’
Listen to this article
Loading audio...
Would depositors get their money back? Despite assurance from the Bank of England and the Prudential Regulation Authority, that people with up to £85,000 in an authorised bank would be able to get their money out, protected under the Financial Services Compensation Scheme, it took time for the lengthy queues to dissipate.
It is as well to remember what happened in 2008/9. In the US, banks were lending vast sums of money in the form of mortgages, indiscriminately, to people across the country, who clearly could not afford to service their debt. The damage to the global financial system without adequate regulation, was seismic.
It precipitated the banking and credit crisis, which swept across the world like the Black Death of 1361/2. The situation was exacerbated by a sophisticated derivative market, though unintelligible to many, which most international trading banks indulged in.
The damage inflicted on international banking was further fuelled by a rampant futures market. On top of these issues, banks had also been funding property deals injudiciously and too excessively.
The threat of another banking crisis today, precipitated by problems exposed at SVB Investments, First Republic Bank in California and finally a third of Signature Bank's assets have been bought by New York Community Bank, and their 40 branches, are totally different from the issues of 2008.
The refusal by US Treasury Secretary Hank Paulson in September 2008 to bail out Lehman Brothers was, in hindsight, a regrettable decision.
There was a great opportunity for many of Lehman’s counterparties to pair off their exposures on an array of deals through the international clearing systems. The failure to capitalise on this opportunity, meant exaggerated losses were crystallised.
Listen and subscribe on Global Player: MONEY with David Buik and Michael Wilson: A Global original podcast
Money with David Buik and Michael Wilson
David Buik & Michael Wilson, two of the most respected commentators in the world of Money and Business come together for a weekly podcast – Money! As the markets become ever more unpredictable and peoples finances get stretched, they will detail the stories you need to be looking at – whether it’s mergers, acquisitions, or the effect of inflation on your wallet, the Money podcast will be covering the big business stories and how they affect you.
In response to today’s banking problems, the public should be reassured on three key issues. The regulation of banks is much more stringent.
Banks now require almost ten times the amount of capital to do the same level of business they did fifteen years ago. The involvement and cooperation amongst the Central banks in the past two weeks has been pivotal, and finally, the banking problems have been much more localised issues.
That of course does not mean that there is no need for circumspection. However, what it does mean is the problems might be easier to deal with, though contagion should never be underestimated.
Central banks have acted quickly and decisively to today’s crisis. The FED has made provisions for SVB Bank to have access to a $30 billion facility, supported by major US Banks. Help through the FED has also been found for First Republic and for Signature Bank.
This is no small achievement. In the case of SVB Bank, which finances a significant proportion of California’s tech operation, the writing was on the wall, when depositors attempted to pull out $42 billion last Friday week.
Why? For reasons best known to the management, a large amount of Treasuries had been bought for liquidity purposes, when interest rates were close to zero. Official rates are now 4.5% to 4.75%, due to inflation. Hence huge losses have been incurred in a relatively short space of time.
The market will also want to know why CEO Greg Becker sold nearly $30 million of stock in SVB over the past two years and over $3 million at the end of February. After consultation, with the Bank of England, HSBC scooped up SVB Bank UK for a £1 in a smoothly controlled manner. This could prove a very shrewd deal.
As for Credit Suisse, it has been inadequately run for a few years, incurring huge losses from its investments and support of Greensill and Archego Hedge Fund incurring losses totally $15 billion.
Initially the Swiss National Bank provided a $53 billion facility to reassure markets. Over the weekend UBS, Switzerland’s largest bank has agreed to buy Credit Suisse for circa $3.2 billion.
Both banks have a total of 125000 employees with about 9000 in London. It seems that redundancies are inevitable.
Both banks are focused on Wealth Management, so some Cherry picking of staff will take place. UBS is also a major contributor to M&A and corporate finance.
This hectic activity over the past week will hopefully calm markets eventually.
But the ‘Doubting Thomases’ will still be massing their troops, looking for weaknesses in the system to expose. Contagion takes a long time to come back on the bridle! Eventually, it is hoped that good sense will prevail.
As a result of these machinations, many large international banks across the spectrum have shed 5% to 10% in value in the past week, resulting in qualified stock market turmoil. It does not take much in the way of unwelcome news to rattle the cage of stability!
The FED meeting on Wednesday and the MPC meeting on Thursday may see no increase in rates until the dust settles. If not, 0.25% increase for both will suffice.
