Silicon Valley Bank - 2008 Mk2?

[Broucek]

Choice 1. Bail out the banks, (using public/government money) to protect bank shareholders, theoretically, support bank lending/credit (private money) in the economy. Party on.

That's not what happened, in general, in the GFC. Bank shareholders took huge hits in 2008.

The key policy aim is to protect depositors (individuals, businesses, schools, charities etc.) and the overall payment system that allows the economy to function

Of course many of us WERE bank shareholders indirectly (think private sector DC pensions) but losing a few percentage points off your pension is rather less scary than not being able to access your current account

 

[Wynd]

That's not what happened, in general, in the GFC. Bank shareholders took huge hits in 2008.

The key policy aim is to protect depositors (individuals, businesses, schools, charities etc.) and the overall payment system that allows the economy to function

Of course many of us WERE bank shareholders indirectly (think private sector DC pensions) but losing a few percentage points off your pension is rather less scary than not being able to access your current account

The money is the debt and the debt is the money.

No private debt = no private money.

Side point, but no Public debt = no money whatsoever!

A huge proportion of deposits, arise because someone somewhere else is running an overdraft. That the fractional reserve piece. Debts represent 10x the capital base, at least.

A credit system, FIAT, means wiping out creditors wipes out deposits and then some. You may think its deposits we are protecting, but its actually lenders. The bulk of deposits are a function of lending in a fractional reserve system.

The bank is not lending you someone else's money when you take out a loan. They are writing you a loan and creating the new money on screen.

I don't think many really grasp this. Its a debt system, not a money system. Its credit, not money in the traditional sense of gold and silver.

And this is why the point stands. If public money is used to bail out private banks, why not just have only public banks with public money... the rebuttal is as above, because markets, in a word.

 

[duncanp]

Choice 1. Bail out the banks, (using public/government money) to protect bank shareholders, theoretically, support bank lending/credit (private money) in the economy. Party on.

Choice 2. Dont print additional public/government money. Let the banks fail. Capital base wiped out. Private money supply, credit/debt can then be called by whatever legal entity is left. In theory, this means all mortgaged/credit cards/overdrafts/loans get called, in as little as 30 days. Personal and corporate bankruptcies soar as the money supply decreases overnight by 90%. All music halted and only 1 chair for every 10 dancers.

Its a choice. You could go for option 2 but what would effectively happen is the Bank of England would be nationalising the mortgage/credit/loan/overdraft markets at a stroke and effectively eliminating private money, and thereby commercial banking.

We would all hold accounts with the BOE. Some call this, "sound money" and it has been used, extensively in the past. Gold/Silver money. Gold Standard. Tally sticks. Clay tablets.

The primary snag, understatement, is that it kills, stone dead, credit markets not on a personal level only, but on a commercial level. Bond markets no longer have a secondary component, as there are no primary dealers, they all went under. This means no money markets, although I don't suppose you need it if there are no overnight lending requirements or discount window.

To say it would be a painful re-adjustment would be an understatement, but many argue, cogently, that this is the way things should go.

What doesn't help the broader argument is that every time commercial private banks get in to trouble, they are not allowed to fail and continue to be bailed out, so what difference does it make if we all keep assuming their debt anyway? Why not just cut out the middleman and assume the debt collectively ourselves...

Fractional reserve banking is great when it works well, lots of credit and subsequently innovation, but it does have a nasty habit of relying on public money, but then again, we all do.

Option 2 is political and economic suicide for any government that contemplates it.

I don't think any of the major banks in the UK (HSBC, NatWest, RBS, Barclays, Lloyds) are even remotely close to failing.

The stress tests introduced after 2008 mean that the banks have had to show the Bank of England every year that their finances can withstand various scenarios. If you search "Bank of England - Stress Testing", you can find the page which gives all the details.

But if you search on a price comparison site for bonds or savings accounts, some of the highest interest rates are offered by banks that you have never heard of before. The rates look attractive, but they come with a much higher risk. It is these lesser known banks that the government might be more willing to let fail. The shareholders would have to take a haircut, but individual depositors would be protected up to £85,000 by the financial services compensation scheme.

 

[RailWonderer]

Money is made with investments using funds that we don't have. Borrowing from the BOE from high street and investment banks funds investments which sees a return which benefits pension funds, investment accounts etc, which is then spent in the economy. We are tethered to banks whether we like it or not, unless we all move to decentralised finance, where we remove all banks and we all borrow from each other and lend to each other. However with no central bank which can regularly print money to fund investment which funds growth, what you will then have is stagnation, followed by all the money eventually reaching the same few places very quickly because no new money will be generated, existing money will only move in one direction.

Under the current system most new money moves to the same places, but much more slowly because it is moving through the entire economy first. See income inqeuality in recent years. Fewer people hold more and more of the world's money as time goes on.

 

[brad465]

Now First Republic, a regional US Bank, has seen $30bn injected in from larger banks to try and shore it up. Credit Suisse has also seen further losses despite support from the Swiss Central Bank:

Multi-billion dollar rescue deal for First Republic Bank

Wall Street says the move to prop up First Republic reflects confidence after bank failures.

www.bbc.co.uk

A group of big US banks has injected $30bn (£24.8bn) into a smaller regional bank, First Republic, which had been seen as at risk of failure.
The move came as authorities in the US sought to ease concerns about the health of the banking system, after a series of bank collapses in the US.
Worries about the sector have spread globally, as Swiss authorities extended an emergency lifeline to troubled giant Credit Suisse.
The aid helped calm financial markets.
Major stock indexes across Europe rose after the Swiss National Bank said it was extending up to £44bn in emergency funds to Credit Suisse.
Its shares bounced back more than 15% after big falls a day earlier.
In the UK, the FTSE 100 closed up roughly 0.9%.
The three major indexes in the US were also higher.
Reports of the rescue plan earlier sent shares in First Republic surging more than 20% at one point, triggering trading halts. The firm had seen its share price plunge nearly 70% over the last week.
"This show of support by a group of large banks is most welcome, and demonstrates the resilience of the banking system," US financial officials said.
Problems in the banking sector surfaced in the US last week when Silicon Valley Bank (SVB), the country's 16th-largest lender, collapsed in the biggest failure of a US bank since 2008.
That was followed two days later by the failure of New York's Signature Bank.
Authorities stepped in to guarantee deposits beyond typical limitsin an effort to head off further runs on bank deposits.
In an appearance before politicians in Washington, US Treasury Secretary Janet Yellen told the Senate Finance Committee that depositors should have confidence in the system, while emphasising the severity of the episode.
"We felt that there was serious risk of contagion that could have brought down and triggered runs on many banks and that's something, given that our judgement is that the banking system overall is safe and sound," she said.
Meanwhile, the vice president of the European Central Bank (ECB), Luis de Guindos, said the banking industry in Europe was "resilient" and firms there had "limited exposure to the institutions of the US".
He spoke as the ECB announced a further increase to interest rates from 2.5% to 3%, sticking to its plan for a rise despite concerns about how the move might affect the market turmoil.

Interestingly the ECB increased interest rates today despite all of this, so it will be interesting to see what the Bank of England and The Fed do in the next week.

 

[yorksrob]

As my Dad always says "if there isn't a recession already, we'll be sure to talk ourselves into one".

 

[IanXC]

The really big difference to 2008 is that bank that represents a systemic risk to the system, often known as a 'too big to fail' bank, has to have a resolution plan. Ring fencing is a key part of making this manageable.

That means if such a bank were to fail there is a pre written plan for how it would be resolved.

 

[Pete_uk]

They still had the money to pay out 15 million in bonuses.

OF COURSE

 

[brad465]

Emergency measures in Switzerland are being prepared to try and fast track the completion of UBS taking over Credit Suisse:

Switzerland prepares emergency measures to deliver UBS takeover of Credit Suisse

Daily deposit outflows at troubled Swiss bank topped Sfr10bn last week as fears for its health mounted

on.ft.com

Switzerland is preparing to use emergency measures to fast-track the takeover by UBS of Credit Suisse, according to three people familiar with the situation, as the banks and their regulators rush to seal a merger deal before markets open on Monday.

Credit Suisse is a very large institution relative to the size of Switzerland's economy, which makes handling it very difficult, as allowing it to fail will be extremely damaging, but if it was bailed out by the state the level of borrowing/QE required would likely make Switzerland the next Zimbabwe (i.e. hyperinflation). I think UBS taking over might buy some time if it works, but in the long run it creates an even bigger problem if things go wrong.

 

[Wynd]

A more prescient demonstration of some of the points I was making above.

https://www.ft.com/content/70ce4b8a-1310-4e3c-a891-3c34cd313841#

 

[WatcherZero]

Hearing there may be legal challenges and possibly even sanctions from the European Central Bank about the way the Swiss authorities are handling the UBS takeover of Credit Suisse, all shareholders are getting about half of their share value back however those with preferential bonds which should be paid before shareholders are getting nothing.

 

[Wynd]

How much remit does the ECB have in Switzerland?

 

[Broucek]

Hearing there may be legal challenges and possibly even sanctions from the European Central Bank about the way the Swiss authorities are handling the UBS takeover of Credit Suisse, all shareholders are getting about half of their share value back however those with preferential bonds which should be paid before shareholders are getting nothing.

I'm told that the "small print" on those bonds allowed regulators to do this. In which case, they were probably over-priced by anyone not realising this...

 

[WatcherZero]

Credit Suisse bondholders prepare lawsuit after contentious $17 billion writedown​

Ordinarily in the event of a bank failure, AT1s — also known as contingent convertibles or “CoCos” — would be prioritized above equity holders.
The bonds were created after the Global Financial Crisis as a means of diverting crisis risk away from taxpayers. The Credit Suisse write-down represents the largest loss ever inflicted on AT1 investors since their inception.
The decision by Swiss authorities to upend the long-established norms and hit AT1 bondholders over equity investors has been criticized for damaging confidence in the asset class, potentially creating a spillover effect in global markets
The ECB Banking Supervision authority, Single Resolution Board (SRB) and European Banking Authority (EBA) issued a joint statement Monday seeking to reassure investors that the Credit Suisse deal is a one-off. Switzerland is not part of the European Union and so is not subject to the bloc’s regulations.
“In particular, common equity instruments are the first ones to absorb losses, and only after their full use would Additional Tier 1 be required to be written down,” the EU authorities insisted.

“This approach has been consistently applied in past cases and will continue to guide the actions of the SRB and ECB banking supervision in crisis interventions. Additional Tier 1 is and will remain an important component of the capital structure of European banks.”
As of the end of 2022, Credit Suisse had a common equity tier one (CET 1) capital ratio, a measure of bank solvency of 14.1% and a liquidity coverage ratio of 144%. These figures suggest that the bank was solvent and had ample liquidity, leading Axiom’s Benamou to question whether the bank should be deemed “failing” in the traditional sense.
The bank lost the confidence of investors and depositors over the last two weeks, resulting in a freefalling share price and massive net asset outflows, and FINMA specified Sunday that there was a risk Credit Suisse could become illiquid, even if it was not insolvent.

Credit Suisse bondholders prepare lawsuit after contentious $17 billion writedown

A number of Credit Suisse bondholders said they are considering legal action after the $17 billion wipeout of the embattled bank's AT1 bonds.

www.cnbc.com

Swiss authorities rushed through a change in the law to allow the writedown of AT1 capital and to allow a takeover to be completed without a minimum six week shareholder vote only two days before the takeover. One of the bondholders saying they are considering suing is a Swiss public sector pension fund.

 

[brad465]

First Republic now been taken over by JP Morgan (making the latter even larger than they already were), a sign this banking turmoil isn't over yet:

First Republic: JP Morgan to take over major US bank

First Republic was seized by regulators, the third major US bank to fail in recent months.

www.bbc.co.uk

JP Morgan is set to take over the troubled US bank First Republic in a deal brokered by regulators.
The Federal Deposit Insurance Corporation (FDIC) confirmed in a statement that First Republic had collapsed on Monday.
Investment banking giant JP Morgan will now take on "all of the deposits and substantially all of the assets of First Republic Bank".
First Republic becomes the third major US bank to collapse in recent months.
The San Francisco-based lender's shares fell by more than 75% last week after it admitted that customers had withdrawn $100bn (£79.6bn) of deposits in March.
It follows on from the collapse of Silicon Valley Bank (SVB) in March, which prompted fears of a wider banking crisis.
That was swiftly followed by the demise of another US lender, Signature Bank.
A deposit flight from lenders has forced the Federal Reserve, the US central bank, to step in with emergency measures to stabilise financial markets.
In March, a group of America's biggest banks stepped forward to pump $30bn into First Republic in a bid to stabilise the business, but the efforts proved futile.
Founded in 1985, First Republic is a mid-sized US lender, similar to SVB.
For years, it has catered to wealthy clients - whose money was at risk before the takeover was announced after a weekend of negotiations.

In the US, FDIC insures customer deposits up to $250,000.
When Silicon Valley Bank and Signature collapsed, the FDIC said it would guarantee all deposits to prevent a rush of people trying to get their money out, which is known as a run on a bank.
As part of the First Republic agreement, it will share losses on loans with the JP Morgan. The FDIC has estimated that its insurance fund would take a hit of about $13bn in the deal.
First Republic's 84 offices across eight states will also reopen as branches of JPMorgan Chase.
In Europe, banking giant Credit Suisse was bought by rival UBS in March, in a deal orchestrated by Swiss authorities.
As central banks around the world raised interest rates aggressively to dampen the rate of price rises, otherwise known as inflation, some lenders have come under pressure.
Increased interest rates have hurt the values of the large portfolios of bonds bought by banks when rates were lower.

 

[Mcr Warrior]

First Republic now been taken over by JP Morgan (making the latter even larger than they already were), a sign this banking turmoil isn't over yet:

"Turmoil" seems a tad hyperbolic, but I doubt this will be the last second or third tier bank that needs rescuing.