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In Mary Poppins, young Matthew Banks wrests tuppence from the palm of old Mr Dawes, the Director of the Dawes, Tomes, Mousley, Grubbs Fidelity Fiduciary Bank. His cry of “give me back my money” sparks panic among other customers and a run of the bank.
It is the classic fictional guide to a banking stampede, and what has happened at Silicon Valley Bank is a classic illustration, at least at first glance. In this case, Banks’s role seems to have been played by Peter Thiel, the venture capitalist and Paypal co-founder, who advised that depositors should pull their money out of the bank.
Having which, the Dawes, Tomes, Mousley, Grubbs Fidelity Fiduciary Bank was fundamentally sound. (You will remember that George Banks, Matthew’s father, ends up being promoted – so no harm done.) As far as SVB is concerned, that ain’t necessarily so.
In simple terms, start-ups must put the cash they get from equities somewhere, and many put theirs in SVB. Ninety three per cent of these deposits were over the £250,000 limit at which America’s Federal Deposit Insurance Corporation is prepared to insure. And higher interest rates are demonstrating, this time with reference to tech, the boom-bust cycle in action.
For some of those start-ups were over-extended, and there may therefore have been concerns about the bank’s solvency, of which the consequent wave of withdrawals were a consequence. But the depositors weren’t the only losers from higher rates. Another was SVC itself.
Paradoxically, the bank had been playing it safe, investing in fixed-rate bonds and loans. However, rising rates reduces their price, so SVC was caught with its trousers down. This is why Noah Smith calls what happened to it “a very normal bank run on a very unusual bank”.
The fate of the depositors was perilous for the tech industry as a whole, which seems to have piled into the SVC partly because it finds it hard to unearth banks who will provide start-up capital, part;y because the bank demanded investment as a condition of loans, …and partly because, hey, other tech firms were doing so, and it’s easiest to run with the herd.
But the behaviour of SVC was plainly nothing like that of the pre-financial crash banks who piled money into unsustainable mortages. One view is that since many banks are either “too big to fail”, or so small that the bulk of their deposits are insured, only a few American mid-size banks are at the risk of a withdrawal stampede from depositors.
Nonetheless, Joe Biden has come in to rescue depositors, and now Jeremy Hunt has, too – greasing the wheels for HSBC to acquire the UK subsidiary of SVB for £1 “with no taxpayer support”. So that’s all right, then: the banks will take the hit necessary to sustain the sector, assuming there is one, depositors will be happy, the industry helped…and no taxpayer stung.
And yet, and yet. Over in the United States, its Treasury has made $25 billion available from the Exchange Stabilization Fund as a backstop for the Federal Reserve’s Bank Term Funding Program. Or in plain terms, election year is nearing – and Joe Biden is ready to chuck yet another dizzying bung at the banks to ward off any banking crisis on his watch.
For the point about the business cycle is it happens and bank runs have a way of happening, too, rationally or irrationally. Queen Elizabeth is said to have asked of the build-up to the financial crash: “why did nobody notice it?” To which the answer may be that the world from which human error is absent isn’t the world we live in.
The next banking crisis may not be linked to rising interest rates (though it’s worth saying in passing that this isn’t the first time their effects have made themselves known recently. Liz Truss’s mini-Budget, anyone? Pension funds? Liability driven investments?) All we know is that there will be one, sooner or later.
And there’s reason to think the way we live now makes the banking system more volatile than ever. There is a mass of research on the effect of smartphones on young people’s mental health. And just as we can now cancel each other on WhatsApp, or whatever its successor turns out to be, so we can all now cancel our banks – in a manner of speaking.
For while it is legendarily galling to negotiate one’s way past the callcentre operative whose English is less than perfect, or remember the answer to a security question one may not actually have been asked, it has not previously been possible to transfer money over an app – and so potentially contribute to a virtual bank run.
It’s too early to calculate the effect of American taxpayers standing behind American banks, in Biden’s latest iteration, on the operation of the financial markets and the workings of the economy. But there’s seldom a wrong moment to brood over bank rescues, moral hazard, recent history, and the world we live in (not to mention where it’s going).
The story of the last 15 years or so has been heads you lose, tails you lose. If you don’t bale out a troubled bank, you go all Northern Rock, with queues stretching at cash machines and governments feeling the electoral heat from consumers. If you do, then the taxpayer ends up footing the bill, not only for depositors but for shareholders, too.
Additionally, you journey into unknown country – at least, if recent events are any guide. Quantative easing was necessary after the crash, just as emergency measures were during Covid. I’ve a list available of free market enthusiasts who took the point at the time, recognising that an economy which goes into shock requires emergency resuscitation.
But just as one can get hooked on painkillers, so a country can get hooked on q.e – and so it has proved in recent years, in circumstances with which we are all familiar. One way of allieviating the problem, and some of the consequences of Gordon Brown slowly draining our capital pools, as one observant Minister I know puts it, is getting banks to cover their own funerals.
That was the point of the Vickers Report, which recommended ring fencing to separate retail banking from investment banking – in other words, in layman’s terms, a return to the system that pertained until the Glass-Steagall system was swept aside, despite the warnings of the Gods of the Copybook Headings, under the Clinton administration.
Vickers also proposed that banks retain higher capital and loss absorbing reserves. Five years ago, he complained that, despite the Government accepting his report, the Bank of England’s bank stress tests weren’t exacting enough, and that progress to ensure that the banking system is more resilient has been “really disappointing”.
As I say, the tech sector will heave a sigh of relief at the bale out – though it won’t necessarily be thankful, gratitude being in short supply these days. As will its libertarian pioneers in Silicon Valley who now find themselves being baled out by the very taxpayer subsidies that they usually denounce. Which is suggestive.
A world in which taxpayer commitments grow ever-larger and the state gets even bigger will be an unhappy one for conservatives – and sooner or later, we argue, for everyone else too. Shouldn’t we get at least as excited about the future of the banks, on which we rely, whatever now happens to SVB, than the future of a football presenter, on which we don’t?