Fifteen years ago, a financial crisis began due to inadequate supervision, erroneous assumptions about risk among directors and a market that was crying out for investment product. The iceberg became visible when Lehman fell over. Not just any bank; 25,000 employees, USD 639 billion balance sheet total (for comparison: ABNAmro at the end of 2022 EUR 379 billion), 3rd largest bank in the US. As often after something seriously goes wrong, the reflex is to take measures “so that it can never happen again”. Heavy measures, imposed by politicians, elaborated by regulators and implemented by the financial sector were the result. Banks were even cut up to help regain the badly damaged trust of citizens. No more mixing of the safe savings and payment bank with cheap capital for risky activities (investment banking). Huge investments have been made in building risk management in many aspects of banking; not only avoiding dependencies on a small number of large clients, but also limiting concentrations in professional counterparties in processing or financing transactions.
But the financing of the world is a market, and so there is competition and if there is competition there are interests and if those interests become large enough, it becomes part of politically driven action. In the Netherlands, the vast majority of banking activities are concentrated in a handful of parties. In Germany and France, in addition to the national champions, regional players are also active. Supervision within the European Union (EU) is coordinated by 1 party, the European Central Bank (ECB). Each EU country has traditionally had its own supervisor for local implementation. There is 1 set of rules, politics has little direct influence on it. The threshold to apply for a completely new banking license is therefore considerable. That is different in the US. In addition to national champions, there are also large regional, or otherwise specialized players. This falls under central supervision, but “to keep it workable” there are differences in supervision between internationally active players and exclusively nationally operating banks, there are differences in severity as the size differs and there is no integral set of rules within the same supervision. Over the years, surveillance in the US has been partly decentralised and partly weakened compared to the situation in the first years after the crisis.
For example, it can happen that a bank arises where a lot of vulnerable property of innovative industry was parked and after inattention (or were people stubborn?) that money was invested, making it more difficult or with financial damage to withdraw if that parked money is requested. The interest rates incurred in recent quarters caused the market value of Silicon Valley Bank (SVB) investments to fall. This resulted in a (at that time still paper) loss of USD 1.8 billion. The bank was (late) raising new capital to absorb that loss. Exactly how it turned out is currently being investigated, but statements by a major capital provider in the innovation industry that he had withdrawn his money there because of his doubts about the robustness of SVB contributed to the “bank run”. On 1 day, USD 42 billion in assets were withdrawn from SVB and the bank did not have that liquidity; the direct result is a bankruptcy of SVB.
The supervision of banks in Europe is not without its shortcomings. But it’s a lot more robust than the American version. After the first emotion that the American taxpayer is disappointed that the promise of protection against repetition has been broken, the second came that the innovative part of the American economy shows considerable interconnectedness, so that the second promise of the new, expensive, supervision also appears to be broken. So there is again contamination of banks among themselves, the market concludes. And this immediately sends the bank shares into the depths. Even though SVB is by no means too big to fail, the U.S. government is simply not sure how much the contagion has taken hold. So President Biden comes up with the same checkbook as in mid-2008. So what is the market’s reaction? You see! And because the largest capital market on the planet does not know how to move, other markets also have to deal with this uncertainty. Some also think back to the Savings & Loans crisis of the 80s; actually also a supervisory problem of regionally active savings banks.
This mess is very bad for the world. It immediately casts doubt on previous clear policy intentions by central bankers that interest rates really need to rise to curb inflation. Do they still do that when a crisis of confidence in banks is lurking? In the meantime, the consumer suffers unnecessarily a little longer.
As long as no firm action is taken, the market is looking for ways to make things easy for itself. That is not surprising, and we do not even blame market parties for that. By putting things on edge, new, better solutions become available for people with a financial plan. But then supervision must improve considerably. Perhaps it will help if financial representatives of the rest of the planet who also invest in dollars call out the U.S. president and the Federal Reserve Bank. The damage justifies it, and they have now hit an immense stone twice. Would they learn this time?