1996 slasher movie Scream He outlines three rules for horror movie survival: you can never have sex, you can never drink or do drugs and you can never, under any circumstances, say “I’ll be right back.” Among recent bank failures, Silvergate has done the deed, squandering her parents Tia Maria’s signature bank and Silicon Valley bank before heading out to check out strange noises in the park. Having committed all the obvious banking sins, everyone was duly punished.
International bankers and regulators, watching the recent fiasco of US banks, are feeling disdain. “Poor management, weak supervision and poor organization. Someone told me recently. They are not overly concerned about the same thing happening on their patch. But there is one breakdown that the banking community takes differently. Something that worries everyone, because it casts doubt on the basics of financial regulation. The Credit Suisse failure is indeed a horror story.
What happened to Silicon Valley Bank – the most emblematic of this round of American bank failures – is well understood. It’s a tale as old as banking. SVB has raised billions of dollars in uninsured short-term deposits from start-ups. He invested it in highly rated long term securities. Interest rates have gone up. The value of long-term securities decreased. Depositors realized and demanded their money back. Borrow short, lend long, see you in hell. The only wonder is how people let this happen. Silvergate, Signature, and First Republic are variations on the theme, with added encryption.
Credit Suisse — forcibly sold to fierce local rival UBS, a week after the Silicon Valley bank’s trip into banking in Valhalla — was different. Yes, the Swiss lender has been involved with all sorts of questionable characters, from default bills financier Lex Greensill, to Bill Huang of Archegos, who has been as long and wrong as any trader in recent history. Yes, it needed painful changes to its business model, with profitability under pressure for the next several years. But Credit Suisse was not betting madly on interest rates. There was no read across from SVB. It had a strong balance sheet and a valuable core business franchise. From a horror movie perspective, Credit Suisse may not have been the heroine, but he was a goofy best friend who followed the rules and did nothing to lure the killer’s attention.
However, although the events in the United States did not provide new information about the case of Credit Suisse, the depositors of the Bank of Zurich still worked, which made every banker and regulator in the world look over their shoulders. The post-2009 bank settlement included high levels of capital to protect against losses and rules on liquidity to deal with sudden demands for cash. The Silicon Valley bank did stupid things and its depositors were in danger. But if Credit Suisse had been suffering for a long time even though it was liquid and well capitalized, the same could happen to any other bank, anywhere, anytime.
The bank’s work in March and April was unusually fast. The Silicon Valley bank lost 25 percent of its deposits in one day and was set to lose another 62 percent the next day, if it had not closed. Silvergate and First Republic lost half of their deposits in two weeks. Several factors have been put forward to explain this—new technology makes it easier to withdraw electronically; the presence of large uninsured corporate depositors; Rumors and misinformation spread on social media — but nothing quite satisfies.
According to Jonathan Rose, a historian at the Federal Reserve Bank of Chicago, express electronic withdrawals were a problem as early as the run in Continental Illinois in 1984. But in the back office “the staff knew what was going on when withdrawal order after order was moved on.” The Wire, resulting in Continental bleeding to death.” Wealthy customers moving money on their mobile phones may have helped kill Credit Suisse, but that cannot be the whole story.
Banks with large amounts of uninsured deposits aren’t new either, Rose points out. Only 6 percent of SVB deposits are insured, which is very low, but comparable to 15 percent in Continental Illinois. Most of Credit Suisse’s private bank deposits were outside the scope of insurance, but they always were. The concentration of deposits from the tech industry at SVB, Silvergate and Signature was a bit unusual, but that didn’t apply to Credit Suisse at all.
Social media is one of the new forces in a banking crisis. Facebook started in 2004 and Twitter in 2006, but they’re not yet global, and they both exploded during the 2008-2009 financial crisis. Social media connections have clearly fueled the escape on SVB, but an important topic that regulators need to understand is how Credit Suisse’s private banking clients around the world received the message of the escape. What if, in the future, a similar round is started on the basis of complete lies about a solvent bank?
Ultimately, the question for Credit Suisse is whether any amount of capital and liquidity can make risk banks safer, strengthening the case for narrow banking or access to central bank funds more widely. The innovation momentum is already in this direction and it will really be a horror story for commercial banks. As the heroine in Scream He asks wistfully, “Why can’t I be in a Meg Ryan movie?”
robin.harding@ft.com
