In recent weeks, the news has been marked by several bank defaults. Nothing to do, however, between the announced setbacks of Credit Suisse, the very particular case of Silicon Valley Bank (SVB), the debacle of Silvergate and Signature Bank linked to the FTX scandal and the surveillance by Moody’s of six small banks and medium. large Americans, including First Republic Bank, which has been badly battered in the markets.
Faced with this turbulence, which revived all fears linked to a global systemic collapse of the banking system, the French Finance Minister, the Governor of the Banque de France and then the President of the French Banking Federation (FBF) took turns ensuring that the Contagion risks were almost non-existent for French banks.
These words were certainly not spoken on air. They are based on a very restrictive regulatory system, on stress tests that are regularly carried out on the exposure of the largest banks to unfavorable scenarios. Finally, they take into account the realities: indeed, the risk that the current bankruptcies put French establishments in trouble, due to contagion effect, seems almost non-existent.
However, are these statements really reassuring? Probably no more than all of them are believable, there are a lot of them! – which assure us that the banks are in a state of near bankruptcy that nothing could be enough to bring about. And this, in both cases, for the same reason: banks finance economic activity. They are naturally exposed to all its dangers. One or several banks may default – we have examples of this before us – but to say that almost all banks would be in a kind of latent bankruptcy does not make sense until the economy itself has recovered. On the contrary, emphasizing the soundness of banks because their regulatory ratios are respected is only valid to the extent that the economy itself does not undergo major changes. This is exactly what the SVB case has just shown.
The end of free money
Like other medium-sized US banks, and through effective lobbying, the SVB had freed itself from certain prudential rules. It is not clear, however, how these could have done more than delay an inevitable outcome. How many days does it take to hold 10-15% of the statutorily guaranteed capital against assets when an institution sees its deposits cut by almost a quarter in a single day? And how much are these equity funds worth when invested primarily in Treasury bonds, whose rising interest rates have mechanically lowered their value?
The SVB operated in a sector, that of start-ups, which was obviously exposed to the end of free money. Everyone should have noticed, and in the case, it was the complete lack of anticipation that was fatal. Whether it’s start-ups unable to realize that investor funding, on which they largely lived while money was free and often relieved them of the concern of being profitable, could dry up: the SVB underlined that its spending remained well above its 2021 level.
Whether it’s the federal and Californian authorities who seem to have seen nothing coming, while rumors about the survival of the SVB have been circulating for months. Or if it is the SVB itself that, very recently, offered start-ups advances for their future fundraising, which they later refinanced in the market. Having drastically reduced these deposits with the rise in the cost of money, the last operation of this type found hardly any interested parties and this was the triggering factor of the crisis. In the case, it is only the leaders of the SVB who showed foresight, selling en masse, before everything collapsed, the shares they had (today they are being prosecuted for this reason).
Why so much blindness? Many claim that what is happening today shows that no lessons have really been learned since the 2008 crisis. But that is not the case. In 2008, the US authorities allowed a large establishment, Lehman Brothers, to go under, creating a crisis of confidence that in turn resulted in a bank refinancing crisis. The solution was not found until the early 2010s: massive liquidity injections by central banks.
For a little less than a year, the Federal Reserve Bank announced that it wanted to end these injections of free money. Still, to fight inflation, it suddenly raised its rates, from 0% to 4.5% in nine months. But what have we seen with the SVB? The investment funds or start-ups that they financed – it all started with Peter Thiel’s Founders Fund – whose deposits in the establishment ran the risk of not being recovered in the event of closure, knowingly created panic on social networks, causing a almost unprecedented run on the bank. As if they were trying to force the Fed to intervene, playing on the fear that systemic risk would hit all banks. The lesson of 2008 had been well learned. Ultimately, we trust the Central Bank.
The 2008 crisis digested
However, this is ultimately what the Fed did, guaranteeing all of SVB’s deposits and allowing banks, in the face of massive withdrawals, to borrow from it through a Bank Term Financing Program by pledging your assets, including treasuries… to your face. value, thus neutralizing its depreciation caused by the rise in interest rates.
The Swiss National Bank did no differently, allowing UBS to buy for scrap (3 billion Swiss francs) a store that was still worth more than 7 billion three days earlier (and 27 billion three years earlier). This with a guarantee of 9,000 million for the doubtful assets that UBS could discover in the books of Credit Suisse and a liquidity line of 100,000 million, to avoid that the crisis of confidence that has affected Credit Suisse, marked by massive withdrawals, does not spread to its new owner.
What to conclude from this? That the 2008 crisis is over. No more nationalizations or direct state bailouts -in both cases, SVB and Credit Suisse, the shareholders and first creditors will have to assume their losses-, but the action of central banks as lenders of last resort (and that with the arrangement found by the Fed on the face value of Treasury bills for banks, allows it to keep raising rates).
We focus on contagion risks but central bank interventions neutralize the systemic risk of illiquidity that banks, given the amounts at stake, cannot cover on their own. So what is the point of emphasizing its strength against regulatory ratios? Banks are subject to the whims of the economy; such as the rate hike, whose impact will not be limited to the Tech sector.
But who anticipates it, particularly at the level of the European Central Bank? Certainly, whether in terms of their results, their reserves or their diversification, the big banks today are solid as a whole. But what will the gigantic portfolios of real estate loans granted at rates well below those already imposed on the markets be worth tomorrow? This could translate into the prospect of losses against which regulatory ratios will count for less than the intervention capacities of central banks.
Source: BFM TV
