No one in the Treasury had expected March to be easy. Last Monday’s economics-heavy review of defence and foreign policy, and last Wednesday’s budget, meant that a tough week for its mandarins was already priced in. But none of them had expected to have to sell a bank for £1.
That happened in the early hours of Monday, when Treasury and central bank officials eventually brokered a deal for HSBC to buy the UK arm of Silicon Valley Bank (SVB UK) for a nominal fee – following the collapse of SVB’s California parent when a disastrous investment strategy unravelled.
After a frantic weekend spent trying to salvage the bank, on which much of Britain’s tech sector depended for cashflow, they then had to finish Jeremy Hunt’s maiden budget.
However, the rescue turned out to just be the “warmup act in some ways”, according to a senior Whitehall official. What followed was days of near-constant communication with the Bank of England in order to avoid a re-run of the 2008 banking crisis, as confidence faltered in Switzerland’s second-largest lender, Credit Suisse.
“There was much more concern about Credit Suisse and the aftermath of Silicon Valley Bank’s collapse this week than the budget,” the official said. “There have been a couple of discreet naps between calls at 1am and 3am in the conference rooms. Life, rightly, got cancelled.”
Monday’s deal only provided a respite before a week from hell began to unfold. Europe’s Stoxx bank index, which measures the movements in major banking stocks on the continent, fell 5% at the start of trading on Monday, and London’s blue-chip index also fell into the red.
“The fact that the US bank [SVB] had some difficulties meant that people started looking around and asking ‘What are the other weak points globally?’” says Frédérique Carrier, British head of investment strategy for RBC Wealth Management. “Credit Suisse has been riddled with controversies. That was an obvious weak point, and the statement that there was some accounting irregularities, plus deposits coming out of the bank, made the situation precarious.”
Tuesday’s admission by Credit Suisse that it had found “material weaknesses” in its financial reporting mattered hugely to global markets. While it is far smaller in terms of assets under management than it used to be before the global financial crisis, it is still one of Switzerland’s largest lenders, and a major European bank with a significant role in investments and some financial instruments. It saw more than $450m (£370m) in net outflows from its US and European managed funds between Monday and Wednesday, according to analysts Morningstar Direct.
Some high-profile voices have stoked fears that problems at the likes of SVB and Credit Suisse could spill over to the entire financial sector. Larry Fink – chief executive of BlackRock, the world’s largest asset manager – said on Wednesday that the collapse of SVB could just be the start of a “slow rolling crisis” in the US financial system, with “more seizures and shutdowns coming”.
Meanwhile, economist Nouriel Roubini, known as Dr Doom for having predicted the 2008 financial crisis, warned that while SVB’s collapse had had a “ripple effect” on the financial sector, any potential failure by Credit Suisse could prove to be a “Lehman moment”.
While it is too early to say what the long-term effects of these emergencies might be, the pressure is on for global leaders to try to restore calm.
Finance ministers and central bankers are at pains to reassure markets and the wider public that while billions might have to be pumped into banks, this time things are different: we will not be plunged into another global financial crisis.
Joe Biden stepped up on Monday to stress that “the banking system is safe” and “your deposits will be there when you need them”. Janet Yellen, the US Treasury secretary and a former central banker, repeated that to Congress on Thursday. “I can reassure the members of the committee that our banking system remains sound, and that Americans can feel confident that their deposits will be there when they need them,” Yellen said.
But while nothing has come close to the queues seen outside the British bank Northern Rock in 2007, auguring the global financial crisis which saw the collapse of Wall Street firms Bear Stearns and Lehman Brothers a year later, the mental scars those events left behind mean investors and the public are now easily spooked by the prospect of banks in trouble.
The financial crisis started a course of events that led central banks to slash interest rates to zero – or even lower in the case of mainland Europe. In Germany, for instance, investors had to pay in order to hold government debt, rather than receive interest from it.
Inflation came roaring back last year, fanned by a surge in economic activity after the Covid-19 pandemic and the invasion of Ukraine. The age of cheap money came to an abrupt end, as central banks started to raise interest rates to cool inflation, which was going hard and fast in 2022. If they decide to hike rates again this week, it would be the ninth consecutive increase by the Federal Reserve and the 11th straight increase by the Bank of England.
“The era of very low interest rates is, for the foreseeable future, clearly over,” says Carrier.
And now banks are having to turn to central banks again for support. About $300bn was borrowed from the Federal Reserve in the past week. Nearly half the money, $143bn, went to holding companies for two major banks that failed in recent days, SVB and Signature Bank. The Fed did not identify the banks that received the other half of the funding or say how many of them there were.
In another sign of fears over financial contagion, a clutch of large US banks, including Bank of America, Goldman Sachs and JP Morgan, joined forces to inject $30bn into the US lender First Republic, after fears that it could follow in SVB’s footsteps.
“The actions of America’s largest banks reflect their confidence in the country’s banking system. Together, we are deploying our financial strength and liquidity into the larger system, where it is needed the most,” the banks said in a joint statement on Thursday.
Similar tactics are being deployed in Europe. Overnight on Wednesday, Credit Suisse said that it would take a loan of 50bn Swiss francs (£44bn) from the Swiss central bank, in a move it claimed would “pre-emptively strengthen its liquidity”. It had taken a pounding on the markets: the share price plunged 30% to reach record lows on Wednesday before recovering some ground following news of the loan.
Credit Suisse was in talks with larger rival UBS at the weekend, along with regulator Finma and the country’s central bank. Options included a merger, with financial support from the authorities, sources said.
On Friday, Germany’s finance minister, Christian Lindner, insisted the country’s financial system was stable and that this was not a repeat of 2008.
Yet markets remain febrile: on Friday, shares in Credit Suisse ended down another 8%. The Swiss bank’s recent woes come after a run of scandals. In a little more than two years it has admitted to defrauding investors as part of the Mozambique “tuna bonds” loan scandal, resulting in a fine of more than £350m, and been embroiled in the collapse of the lender Greensill Capital and the US hedge fund Archegos Capital.
Now US investors are launching legal action to try to claw back money lost in bets on the bank, claiming it overstated its prospects before last week’s shares crash. Rosen Law Firm, a class-action lawsuit specialist, has lodged a complaint in a court in Camden, New Jersey, which claims the bank made “materially false and misleading statements” in its 2021 annual report. Credit Suisse has declined to comment on the lawsuit.
More broadly, analysts at the US investment bank Keefe, Bruyette & Woods have said a breakup of the bank was the “most likely solution”, while JP Morgan said a sale to UBS might be the best option.
Still, despite weeks of late-night conference calls between US, European and British central bankers and officials, experts say we are not necessarily facing an immediate widespread financial crisis of the sort that triggers global recession.
“The global financial system is much more robust than it was in 2008,” says Jón Danielsson, a director of the Systemic Risk Centre at the London School of Economics. “The government authorities understand the uncertainty and vulnerabilities much more, and the financial system is much better at absorbing shocks … You can throw a lot at it without throwing it out of kilter.”
Still, the political questions that haunt such state and central bank interventions have returned.
Support delivered by UK and US authorities to the banking sector has already raised questions over the “moral hazard” of effectively bailing out technologists and venture capitalists – including the billionaire and PayPal co-founder Peter Thiel – who tend to criticise big government and state supervision until their own money is at risk.
And while the US money used to save depositors was taken from a pool of cash that American banks fund themselves, that money is still – according to some experts – effectively taxpayers’ money by another name. “That is semantics, because it’s a tax: the government tells the banks to put money into the deposit insurance fund … it’s not free money,” Danielsson says, adding: “That money could have been lent to somebody, or it could help somebody in some way.”