Fernando Zunzunegui

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The failure of a regional bank in the United States need not become a risk for the financial system as a whole. But in banking there is no small problem. The confidence of savers is at stake. Their will is fuelled by social networks. All it takes is a mediatic tweet to light the fuse. Banks, any bank, even the most solvent, are by nature at risk of bankruptcy. They use resources available on demand on a forward basis. In hours, in minutes, in the face of a lack of confidence, orders can be given to transfer funds, emptying their coffers. The flight of deposits can cause a regional bank to fail and trigger a domino effect.

Silicon Valley Bank (SVB) was not only a regional bank, but also a unique bank. It was dedicated to offering services to venture capital companies and in particular to those related to cryptocurrencies and other financial innovations. It was characterised by holding large deposits and using them to buy government bonds. More than 90% of the deposits exceeded $250,000, the limit of the deposit guarantee in the United States.

As interest rates have risen, the market value of government bonds held by banks has plummeted. Long gone are the days when government bonds were considered a risk-free asset. In the case of SVB, in the face of losses incurred by the hasty sale of part of this portfolio and the subsequent failure to recapitalise the bank, mistrust spread among large depositors, leading to a flight of deposits. In a couple of days, 42 billion dollars were withdrawn. A problem of liquidity and insolence, because in banking liquidity and solvency are communicating vessels. Faced with these events, the FDIC, the authority in charge of managing banking crises in the United States, decided to intervene. It created a good bank and guaranteed deposits up to the legal coverage. But political pressures and the deterioration of other regional banks led to classify the SVB’s crisis as a «systemic risk», which enabled it to extend coverage to all deposits and to add a discount line for the Debt in its portfolio for its nominal value in the amount of 25 billion dollars. A controversial decision, as this overreaction points to the weakness of the banking system and increases distrust. In order to manage SVB’s crisis, it would have been sufficient to have provided access to the necessary liquidity to overcome its temporary liquidity problems. A solvent bank must have open recourse to central bank liquidity. The Debt discount facility that was approved ex post, after the crisis was declared systemic, could have been activated earlier, when the first liquidity problems or the inability to capitalise through the market were detected. This simple financial assistance would have calmed depositors and avoided activating the deposit guarantee.

There is a double negligence at the root of this crisis. The negligence of SVB’s managers, who failed to manage the risk of rising interest rates on their debt portfolio, and the negligence of the major depositors, private equity firms in the financial innovation environment, who were unable or unwilling to manage their liquidity. The bank could have simply contracted derivatives or diversified its portfolio to manage the risk generated by interest rate rises. In turn, large depositors could have spread their deposits among different banks or taken out money market securities to manage their liquidity. There is also a cultural problem. The protagonists in this story have an innovative, alternative spirit, they want to set themselves above traditional banking. They consider themselves untouchable. They enjoy political favour. But they are incoherent. Being enthusiasts of the crypto world, detractors of central banks, declared enemies of regulation, they have not hesitated, faced with the risk of losing their large deposits, to ask for a bailout by those authorities they have been criticising. Giving in to these unjustified requests, as we are not dealing with small savers but with risk entrepreneurs with resources and decision-making capacity, the Treasury, the Federal Reserve, and the FDIC decided to rescue them, even if to do so they had to overreact by turning the crisis of a regional bank that nobody knew about into a problem of global systemic risk.

Pandora’s box had been opened. Analysts began to study the bank’s balance sheet and its problems with public debt. They extrapolated SVB’s problem to the regional banking sector as a whole, without distinguishing between business models, and put the losses that banks could assume in the event of a hasty sale of this portfolio at more than 600 billion. A risk that is also present on the balance sheet of European banks, hence the contagion, with falls in share prices. In this context of a systemically important banking crisis, it is always the weakest who bears the brunt. The focus is on those who have problems that they have not been able to overcome. On those who are unable to recapitalise. Credit Suisse has been the chosen one.

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