Bond risks need taming
The immediate market fallout from the collapse of Silicon Valley Bank has eased with the shares of America’s second line regional lenders bouncing back. But this is a tsunami which has not yet calmed.
The flight to safety on both sides of the pond goes on with a weakened Credit Suisse the most significant victim of the unease in europe.
A veil of secrecy has descended over how the failure of SVB is affecting Britain’s challenger banks.
Those of us who remember the way the dominos fell one by one during the great financial crisis, in spite of protestations from management that all was well, must view such declarations with scepticism.
Potentially misleading responses are coming from less established banks once again.
SVB’s London offshoot may have been a specialist lender, but it is hard to think that companies and individuals with uninsured deposits elsewhere won’t be seeking to protect their cash reserves or hard earned savings. At some point, the second shoe will drop given that so far, the UK authorities have not followed their American counterparts by erecting a safety net. There must be a suspicion, as we learned during the 2022 liability- driven investments (LDI) scandal, that the post-financial crisis system is not as robust as we thought.
Former Bank of england chief economist Sir John Vickers is clear on this.
he argues that banks need more capital in their funding structure. The Bank and regulators need to apply more disciplined and transparent stress tests. The inadequacy was true for LDIs and may well be the case for challenger banks and fintech lenders.
Indeed, when the larger banks reaped big profits for 2022 on the back of healthy interest rate margins, no one questioned how wise it was to distribute so much cash to shareholders through dividends and executives in the shape of bonuses. In spite of the whipsaw in gilt prices in September, no one suggested that capital requirements should be adjusted to insure against higher risks for government bond holdings at a time of surging official and market interest rates.
Banks and bond markets generally have weathered the difficulties of the post-2008 era well, including the shock of the Covid-19 shutdown and the war in Ukraine and its inflation fall-out.
There have been some scary moments. As the pandemic swept across the globe, US bond markets were in chaos and it took coordinated interest rate cuts, enormous amounts of money printing (quantitative easing) and swap arrangements among central banks to calm things down. It was an early unheeded warning about how misfiring bond markets can wreck stability.
Rich are different
ACROSS the Atlantic, the SVB and banking rescue is provoking a political storm. The decision of the US Justice Department and SEC to launch investigations into the behaviour of the bank’s chief executive Greg Becker and the company’s finance director Daniel Beck – as they rushed to make share sales as the bank stood on the brink of collapse – looks serious.
US financial justice has a history of acting swiftly and toughly in the face of alleged wrongdoing. The schism goes much deeper than that. US Senator elizabeth Warren, a former Democrat presidential candidate, has demanded that the Fed chairman Jay Powell step aside from any investigation as he was party to reforms in 2018 which eased regulatory requirements for regional lenders.
The Wall Street Journal has weighed into the debate accusing President Biden of ‘telling whoppers’ when he addressed the nation on Monday. It disputed Biden’s claim that ‘no losses will be borne by taxpayers’ noting that bank insurance funds were never intended to indemnify losses on deposits above $250,000. The whole idea is that the richer depositors, chasing high returns, do not deserve a bailout. As was the case in the great financial crisis, ordinary citizens are being asked to rescue the wealthy in the name of systemic risk.
In CASE no one noticed, the annual US consumer prices index decelerated to 6pc from 6.4pc in February having peaked at 9.1 in June 2022.
There are still pockets of surging prices as anyone who has tried to make a hotel booking in the US could testify. nonetheless, the falling headline inflation rate would be an excuse for the Fed to take its foot off the rate accelerator as the financial sector navigates SVB aftershocks.