Anyone could be affected by a bank run if it is possible. The 1996 slasher movie Scream Three rules are set out to help you survive a horror film: You can’t have sex or drink alcohol, do drugs, and under no circumstances can you say, “I’ll return right away”. Silvergate was the culprit, Signature Bank drank Tia Maria with its parents, and Silicon Valley Bank did it both, before going outside to investigate the strange sound in the garden. All were punished for their obvious bank sins.
Bankers and regulators from around the world are enraged by recent events in US banking. “Poor management, poor supervision, poor regulation. One person told me that the Fed had acknowledged this. They don’t worry too much about it happening in their area. There is, however, one particular collapse that the banking industry views differently. It’s one that makes everyone concerned because it raises questions about the foundations of financial regulations. Credit Suisse’s failure is truly a horror tale.
It is not difficult to understand what happened with Silicon Valley Bank, the most emblematic of this recent round of US bank collapses. This is an old story. SVB collected billions of dollars from new companies in short-term, uninsured deposits. They were invested in long-term, highly-rated securities. The interest rates increased. The value of long-term securities fell. The depositors realized and demanded that their money be returned. Borrow short and lend long. See you in hell. It is amazing how intelligent people allowed it to happen. Silvergate, Signature, and First Republic all have variations of the same theme with crypto.
Credit Suisse, which was sold by force to UBS, the fierce local competitor, just a week following Silicon Valley Bank’s visit to Valhalla, was different. The Swiss lender did indeed deal with a variety of suspect characters. From Lex Greensill who financed hypothetical invoices to Bill Hwang, of Archegos – a trader as wrong and long as anyone in recent history – the Swiss lender was no exception. It was true that the business model needed to be changed, and profitability would continue to suffer for years. Credit Suisse didn’t make a bet on interest rate. SVB did not read across. It had a strong balance sheet, and it was a core business franchise with a high value. Credit Suisse was not the hero of the horror film, but a best friend that had done everything right and not tempted the killer.
Even though the US events did not reveal anything new about Credit Suisse’s state, its depositors in Zurich still managed to run, and this is why every banker, regulator, and bank in the world has been watching closely. After 2009, the banking settlement included high capital levels to protect against loss, and liquidity rules to deal with sudden cash demands. Silicon Valley Bank made dumb decisions and put its depositors at risk. If Credit Suisse, despite being liquid and well-capitalised, can experience a run, it is possible that any bank anywhere at any time could suffer the same fate.
Bank runs in April and March were unusually quick. Silicon Valley Bank lost 25% of its deposits within a single day. It was expected to lose an additional 62 percent the following day if they didn’t close. Silvergate and First Republic both lost half of their deposits within a few weeks. There are several factors that have been suggested to explain the situation — the new technology which makes it easier to withdraw money electronically, the large number of uninsured corporate deposits and the spread on misinformation and rumours in social media. But none of them is satisfactory.
Jonathan Rose, historian at the Federal Reserve Bank of Chicago says that rapid electronic withdrawals became an issue even before the 1984 run on Continental Illinois. Rose quotes Irvine Sprague who said that while the banking halls remained quiet, the employees in the back office were aware of what was going on as withdrawal orders after orders moved through the wire, bleeding Continental Illinois to death. Credit Suisse may have been brought down by ultra-rich customers using their mobile phones to move cash, but that is not the only reason.
Rose notes that banks with large amounts of uninsured deposit are nothing new. SVB only insured 6 percent of its deposits, a very low percentage compared to Continental Illinois’ 15 percent. Credit Suisse’s private bank deposits have always been outside of insurance. Credit Suisse was not affected by the unusual concentration of deposits in the tech sector at SVB Silvergate Signature.
The social media has become a new force during a financial crisis. Facebook was founded in 2004, and Twitter in 2006. However, they weren’t yet widely used and widespread during the financial crisis of 2008-09. The run on SVB was clearly fueled by social media connections, but regulators must understand how Credit Suisse clients in private banking around the globe received the warning to leave. What if a future run on a bank is based on utter lies?
Credit Suisse’s question is ultimately whether capital and liquidity are enough to make a bank that takes risks safe. This could be a case for a more restricted banking system or broader access to central bank funds. It would be a nightmare for commercial banks if the momentum of innovation shifted in that direction. The heroine of Scream asks plaintively: “Why can’t I be in Meg Ryan movies?”