Global financial market convulsions, especially in banking – ‘The hurricane siren is blaring’
As I write this, convulsions in world financial markets continue, particularly in the banking sector. Silicon Valley Bank, Silvergate, Signature, First Republic Bank of California and the once-staid 166-year-old Credit Suisse. All dead or dying or saved by rich daddies. Trouble elsewhere too – hundreds of small to medium banks are under stress and their depositors skittish.
Is this 2008 all over again? No, say the pundits — 2008 was due to bad credit; handing out loans that could never have been repaid. This crisis is something else – a liquidity crisis (not enough cash) or a solvency crisis (where liabilities exceed assets), or both. It remains to be seen whether this crisis will disappear with an apologetic smile, or whether it is soon to rise up like the Kraken.
I don’t believe it is going to quietly recede, and here is why:
The first reason is one that seems to have been overlooked. If you spend some time googling images of 2008, you will see lines of worried people lining up at branches and behind ATMs. Sort of like 1929, only in colour. As individual citizens realised that their banks might be in trouble, they often arrived, physically, to get their money the hell out. Or sat on their phones as they tried to get hold of someone at a helpdesk or call centre.
But in the intervening 15 years technology, mobile deployments and friendly online user journeys have completely changed the landscape. If you want to move your money now, you open an app and click a button or two and you’re done. Bank runs are now pretty much instantaneous and painless, at least for the runner.
And so, for instance, SVP saw $4.2 billion disappearing out of customer accounts every hour over a 10-hour period on 9 March.
Visit Daily Maverick’s home page for more news, analysis and investigations
Twitter has also changed the game. If one knows how to deftly avoid the noisy and the nonsensical, you can read some of the smartest financial wonks and commentators who command massive followings on Twitter. They tweet often and with careful forethought, and are seen as excellent barometers of financial trends. Like Nic Carter, who said to his 350,000 followers early during that March week – get your money out NOW. Send it to a safe bank, a big bank, a boring bank. Hundreds of thousands of businesses and depositors did just that, on an iPhone screen, in seconds, sucking the lifeblood of the institutions they left behind.
What are these safe, big, boring banks? They are called G-SIBs. Global Systemically Important Banks. In the US this means Chase and BNY-Mellon and JP Morgan and Bank of America and a few others. There are strict criteria for joining this elite club, governed by something called the Basel Committee on Banking Supervision in Switzerland. Attaining that status means that a bank has been determined to be “too big to fail”. They must be bailed out if they get into trouble to save the global financial system.
Very safe, we are told. We’ll come back to this.
Throughout modern history, banks were the primary places where you deployed your money. Whether you were a citizen or a business. By the end of the 20th century, they were offering checking and savings and tax-free what-nots and securities and T-bills and money markets and CDs and more. You simply transferred your money there and chose a product or three. Most people and most companies spend their entire lives with one single bank as their trusted custodian.
The explosion of fintech has started to change this balance. There are now multiple other easily accessible destinations for your money – investment banks, alt-funds, fractional real-estate partnerships, private debt instruments, “people’s” stock exchanges like Robin Hood and increasingly innovative crypto-related initiatives, especially in the burgeoning world of RWA.
Read more in Daily Maverick: “Crypto and the real world get married and procreate — the happy arrival of baby RWA”
Whereas banks were once everyone’s favourite home, fintech has provided an appetising menu of alternative destinations. Detractors may argue about the lack of federal insurance and other guardrails, but a new generation of people no longer seem to give a damn, and March’s bank carnage can only support their view. Money is now going to be swallowed by these alternative investments and it is not coming back.
Back to G-SIBs. One of the banks to receive state resuscitation on 15 March was Credit Suisse. A G-SIB. A too-big-to-fail bank now about to be acquired by UBS or perhaps even nationalised by the government of Switzerland.
Think about that. If one of these “safe, boring, big” banks had mismanaged themselves into insolvency, then how safe is our banking system, really?
When a bank starts to look shaky, the reaction of counterparties (like other banks) is to avoid doing business with them. But banks need funds constantly to do business. So, long ago the Fed set up a “discount window”, which is an emergency backstop facility when a bank suddenly finds itself short of cash and needs, say, an overnight loan. Banks do not like using this facility, because it broadcasts “I am in trouble”; it is a scarlet letter.
Consider this then – last week the Fed saw an outflow of $152-billion in emergency loans to banks in trouble, via the discount window facility. The highest in history. As Nik Bhatia, Adjunct Professor of Finance at USC and author of the iconic Layered Money says in his latest newsletter – ‘the hurricane siren is blaring’ (italics and boldface are his, not mine).
A final passing snark. The past year has been a misery for crypto-believers, who saw regulators, especially in the US, come at the industry with a sledgehammer, screaming “risky, risky, kill it, kill it” as they served lawsuits, shuttered companies and started scary investigations everywhere across the crypto economy.
Now it seems as though the tables have turned, with Bitcoin up nearly 50% in the past four months and 25% in the past week alone. A smart tweeter somewhere commented – “the regulators have long been warning us that we had to be saved from crypto, now the crypto industry is wondering how to save itself from traditional finance”. DM
Steven Boykey Sidley is a Professor of Practice at JBS, University of Johannesburg