The Banking Crisis in US and its Consequences to …

原创 Guseletov B.P. 中国投资参考

Guseletov B.P.

Doctor of Political Sciences, Head of the Department of Political Science of the Institute of Socio-Political Studies of the Russian Academy of Sciences

The scandal with the bankruptcy of several American banks serving Silicon Valley startups and the cryptocurrency market coincided with the 15th anniversary of the previous banking crisis in the United States, which then turned into the global economic crisis of 2008-2009.

On March 10, the California Department of Financial Protection announced the bankruptcy of Silicon Valley Bank (SVB), the 16th largest US bank by assets, which was focused on Silicon Valley projects. The bank was considered a reliable place for storing funds in the IT business environment, so companies willingly placed their income on its accounts. At the end of 2022, SVB's assets amounted to $211.8 bln. Of these, $73.6 bln were loans issued, more than half of which (56%) were received by venture companies in the fields of technology and healthcare. $120 bln was invested in securities, including US Treasury bonds, which had low yields but were reliable. The bank bought these securities at a time when the Federal Reserve System (FRS) rate was practically zero, so it had a small profit from them. But in 2022, the FRS raised the rate to contain inflation, and as a result, securities (including government ones) with higher yields appeared on the market, and the portfolio collected by SVB seriously lost in liquidity and value. In addition, the decline in financing experienced by the entire IT sector in 2022 forced many companies to withdraw their money from the bank. As a result, SVB began to sell already cheaper securities from its portfolio at a discount, but this did not help.

On March 12, the financial authorities of the state of New York announced the closure "due to systemic risks" of the local Signature Bank, which had a capitalization of $110 bln and also provided services for placing digital assets on customer deposits. He was the main partner of major crypto exchanges, offering clients a platform that allowed them to convert cryptocurrency into dollars in real time. The authorities decided not to bring the case to bankruptcy and announced the closure of the bank, assuring that all depositors will receive their money in full.

In fact, the problems in the US financial market started earlier. In November 2022, the FTX crypto exchange went bankrupt, whose clients withdrew $6 bln from it in a few days. The consequences of this event continue to affect the entire market. On March 2, Silvergate Bank announced the problems due to the sudden lack of capitalization. The message excited investors and partners, and they began to refuse to cooperate, simultaneously withdrawing their funds from the bank. The bank's shares lost more than 25% of their value in a day (and more than 80% since the beginning of the year).

The main problem is that Silvergate, as well as SVB and Signature, was a pioneer of the crypto market, which it entered in 2014, and one of the most popular banks among crypto players. But the death of FTX not only affected the entire virtual currency market, but also caused losses of $1.2 bln specifically to Silvergate.

The history of Silicon Valley Bank resembles the Lehman Brothers finale. Its assets located in different parts of the world are being bought up by local representatives, as it was 15 years ago. So, HSBC bank announced that it bought the British division of SVB for £1. And the Chinese "daughter", based in Shanghai, is offered for purchase by the local Shanghai Pudong Development Bank.

The US financial authorities assure that the situation is under control. The US Federal Deposit Insurance Commission (FDIC) has issued a communique promising that all insured depositors will have full access to their deposits "no later than Monday morning, March 13, 2023." And US President Biden personally stated in a special address that the bankruptcy of SVB and Signature Bank does not threaten the American banking system. Biden discussed the situation in SVB with California Governor G. Newsom.

The collapse of SVB Financial Group's shares provoked a decline in the banking sector not only in the United States, but also in Europe. According to Bloomberg, the capitalization of European banks decreased by $40 bln on Friday.

The former Head of the Fed Bank in Boston, E. Rosengren, noted that the consequences of the SVB collapse could be especially devastating, since the bank was focused on the technology sector and venture capital sectors, in which pension funds were also actively invested.

The bankruptcies of large American banks always have a negative impact on global financial markets. The closed banks played an important role in venture investments, so their collapse will to some extent affect the technological development of the United States. However, if the crisis does not reach the players from the top ten, then, most likely, there will be no serious global consequences.

The American authorities have quite a wealth of experience in relieving problems in the financial sector and the measures were not long in coming. So, all customers of Silicon Valley Bank and Signature Bank will have access to their deposits from Monday, the Fed has launched a new bank financing program that will save them from having to quickly sell securities from the balance sheet in case of a sharp increase in liquidity needs. These measures will help to avoid panic, which could lead to the effect of "infection" and the emergence of a systemic financial crisis.

The closure of banks for the US economy means a decrease in confidence in the system and financial institutions, as well as tightening credit conditions, the collapse of banks puts the Fed in a very difficult situation. On the one hand, it must fight inflation, further raise the rate and tighten financial conditions. The more the regulator raises the key dollar rate and keeps it at the peak level for longer, the higher the probability of a financial crisis and a global recession. In 2008, the American economy could not withstand the rate of 5.25% - and a global crisis broke out. On the other hand, the Fed is forced to rescue the financial system and soften financial conditions. If the US regulator turns towards easing policy before inflation wins, it risks repeating the stagflation of the 1970s, when it took 20 years and the Fed's rate hike to 20% to defeat the entrenched price growth.

A negative scenario is possible if the Fed fails to find a favorable exit and a storm begins in the US market, postponed since 2008 and reinforced by huge injections of cheap money into the economy since that period. Then economic shocks will affect everyone.

In a joint statement, the US Treasury Department, the Federal Tax Service, which serves as the US central bank, and the FDIC said that the Fed will provide funding to the failed banks so that they can fulfill their obligations to depositors. "The American banking system remains stable and stands on a solid foundation," the statement emphasizes. But the problems of banks can lead to a drop in consumer demand and a decrease in the rate of price growth without the need to continue tightening monetary policy.

Nevertheless, many experts believe that the closure of three major American banks and the fall in US financial sector stocks, although they have become a vivid manifestation of a systemic problem, but so far this is not a signal for the beginning of the global crisis. However, in the event of a negative scenario, we should expect an aggravation of the situation in the American and global financial systems. The EU countries will be the first and hardest hit because of their close connection with the American economy, but other states will not be able to avoid negative consequences. At the same time, the Russian economy is facing fewer shocks against the background of isolation. But since the problem is systemic in nature, we should expect an aggravation of the situation in the American and global financial systems and a high probability of a new crisis. According to analysts, rapid coordinated actions by the Fed, the US government and European regulators can mitigate the shocks in the American financial market.

The impact of the US banking crisis on Europe

After the collapse of the American Silicon Valley Bank, Signature Bank and Silvergate Capital, the second largest bank in Switzerland, Credit Suisse, found itself in a difficult situation. Its shares at the Swiss Stock Exchange (SIX) on Wednesday, March 15, updated the historical minimum. The quotes collapsed by 30.8% to 1.55 Swiss francs, which was the strongest drop in one day. As a result of trading on March 15, the drop was 24.2%, to 1.7 Swiss francs. Credit Suisse's largest shareholder, Saudi National Bank, refused to support the stock quotes. The securities of other European banks fell after the shares of Credit Suisse — investors had concerns about the stability of the global banking system after the collapse of SVB. Trading in shares of European banks such as France's Societe Generale and Italy's Monte dei Paschi and UniCredit were temporarily halted due to a sharp drop in prices.

The Swiss financial authorities are ready to provide liquidity to Credit Suisse "if necessary". This case may be the first since 2008 when one of the world's leading banks will be assisted. In a joint statement, the Swiss National Bank (SNB) and the financial regulator FINMA said that they do not see the risks of "infection of Swiss institutions due to the current turmoil in the US banking market."

European financial authorities believe that the situation with banks in the United States will not have a direct impact on the EU economy, which is one of the largest trading partners of the States. According to EU Commissioner for Economics P. Gentiloni, the eurozone economy entered 2023 in somewhat better shape than expected a few months ago, but uncertainty remains high. Despite the risks of recession and the collapse of two American banks, the EU authorities expect slight economic growth in 2023 and a gradual acceleration in 2024.

An emergency meeting at the weekend was held by British Prime Minister R. Sunak with the head of the Finance Ministry and the Governor of the Bank of England. But the authorities have not announced concrete steps to solve the problem. More than 200 executives of British IT companies called on the UK government to intervene in the situation and warned that many of them faced an "existential threat" because they worked with the British division of the bank.

Meanwhile, the Bank of England announced that it intends to apply to the court with a request to introduce bankruptcy proceedings in the British division of SVB.

European experts have long warned that the distribution of "easy pandemic money" will lead to dangerous distortions in the US financial market. If the authorities fail to stop the problem, the crisis will become systemic and will affect almost the whole world.

Consequences of the banking crisis for the global economy

The anti-crisis measures of the American and European authorities cannot yet stop the expansion of a new banking crisis, which threatens to become global. The central banks of the USA, Canada, the European Union, Britain, Japan and Switzerland have announced the creation of a unified fire brigade that will pour money into the most troubled banks every day. Russian experts note the growing distrust of financial structures around the world. Confidence has been lost not only in the rating agencies, which again did not notice the approach of the crisis, but also in the leadership of the US Federal Reserve, which did not see that the "fight against inflation" through raising rates could cause the bankruptcy of hundreds of troubled banks.

On March 19, Swiss President A. Berset announced that the Swiss bank UBS is buying Credit Suisse, which is experiencing difficulties, for 3 bln Swiss francs. In addition, the Swiss government will provide UBS with a state guarantee to cover potential losses in the amount of $ 9.7 bln, and SNB – $108 bln to replenish liquidity.

US and EU regulators welcomed the decision of the Swiss authorities positively. The President of the European Central Bank, C. Lagarde, said that the actions taken by the Swiss authorities are "useful for restoring orderly market conditions and ensuring financial stability."

But the resale of a bankrupt bank in Switzerland could not stop the new financial wave and the US Federal Reserve announced that it was joining the central banks of the EU, Canada, England, Japan and Switzerland in coordinated actions to increase market liquidity. From March 20, the Fed will begin to provide liquidity to banks under permanent swap line agreements in dollars on a daily basis, rather than weekly. Similar decisions were made by regulators in other countries.

The coordination of the anti-crisis actions of the six central banks indicates the potential scale of the problems. Investors around the world have ignored the promises of leading central banks to stabilize the financial system, according to analysts interviewed by Reuters. Bank stocks and bonds fell on March 19, 2023 on concerns about the state of the global banking sector. Reuters also reports on active sales in Asian markets.

Problems remain in the US banking sector, despite the fact that several large banks have invested $30 bln in First Republic Bank. All this increases fears of a recession. So, Goldman Sachs economists now estimate the probability of a recession in the next 12 months at 35%. A number of experts believe that events in the banking industry have dramatically increased the likelihood of a recession, and they expect it to occur this year. A decrease in household lending by small banks in the United States will increase the likelihood of a recession in the United States, according to experts interviewed by the Wall Street Journal.

Former vice president of Lehman Brothers Financial Corporation L. McDonald said on March 22 that another 50 banks in the United States could go bankrupt before the authorities solve the structural problem. Assessing the outflow of funds from the accounts of American financial organizations, McDonald, who worked at Lehman Brothers during the financial crisis of 2008 and was responsible for debt management and trading in convertible securities, predicts "hundreds of billions of dollars" that regional banks in the United States will lose. At the same time, in his opinion, these funds will go to large banks, and then to treasury bonds. The expert added that the US authorities will have to increase deposit guarantees compared to existing ones.

The global banking crisis threatens the environmental agenda

The banking crisis, which shook not only the United States, but also Europe, also negatively affected the green agenda. The bankruptcy of Silicon Valley Bank (SVB) will directly affect the development of solar energy projects, but it can also start a chain reaction, which, according to experts, can "sink" about 200 more American banks, many of which are involved in financing renewable energy sources (RES). SVB has been involved in financing more than 60% of American solar projects. Its collapse threatens the implementation of medium and small renewable energy projects in the United States with a total capacity of 5.6 GW, according to media reports. By 2027, the bank planned to allocate at least $5 bln in loans, investments and other financing for so-called sustainable development projects.

The collapse of Credit Suisse bank, bought out by Swiss competitor UBS, may also negatively affect the reputation of ESG policy. This bank was a major player in the market of complex financial instruments, the purpose of which was to help developing countries to ease their debt burden in "exchange for the protection of nature." With their help, the bank helped governments restructure their debt in order to raise money that could be used to finance environmental measures.

Under these transactions, the bank attracted money from pension funds, including the Swedish Alecta and Nuveen, which is a division of one of the American funds.

Meanwhile, supporters of the green agenda are demanding increasingly stringent climate restrictions for businesses and for investors. Greenhouse gas emissions should be reduced by almost half by 2030 in order to limit the increase in the average temperature on Earth within 1.5 degrees Celsius. This is stated in the report of the International Panel of Experts on Climate Change (IPCC) on the results of the session held in Interlaken, Switzerland.

Translator | Hu Hao

Design | Demi

本文将刊于《中国投资》2023年4月号

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原标题：《The Banking Crisis in US and its Consequences to the World》

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