Silicon slump? How worried should we be about another financial crisis?
They say that when the US sneezes, the world catches a cold. So, how is everybody feeling? In a matter of weeks, three American bank failures (Silicon Valley Bank, Signature Bank and Silvergate Bank) and the government-brokered acquisition of Europe’s floundering behemoth Credit Suisse have caused heart palpitations in the City. If West Coast panic spreads to the streets of London, what might that mean for you? What about your mortgage, your savings, your job, your life? What, exactly, is going on?
Not very long ago, this all felt very far away. On 10 Mar, Silicon Valley Bank (SVB), a lender deeply enmeshed with the lives of tech’s biggest names, became the largest bank to fail since the 2008 financial crisis. After credit rating agency Moody’s warned that the bank’s bonds were in danger of being downgraded to junk due to a worsening economic climate, clients pulled out $40bn (£33bn) of their money during a single Thursday. ‘If you’re going to panic, panic first,’ quipped a venture capitalist, as customers queued round the block outside SVB HQ in sunny Santa Clara, California. A tearful Sharon Stone claimed that she’d lost ‘half my money’ in the collapse.
You often don’t know where the bodies are buried until you see the stress
Ex-SVB CEO Greg Becker, turfed out after a swift Federal Reserve bailout that saved depositors fortunes, jetted off to his £2.5 million Hawaii bolthole in shorts and flip-flops. Closer to home, the Government’s rescue bid, Project Yeti, swung into action. Rishi Sunak’s whirlwind overnight operation tapped advisers including former British chancellor George Osborne, hooking up SVB’s ailing British arm, which has 3,300 UK clients, with HSBC as a buyer. It cost a symbolic £1. ‘Deposits will be protected, with no taxpayer support,’ Chancellor Jeremy Hunt wrote on Twitter. For a hot second, SVB was seen as simply an eccentric, under-regulated outlier operating in a particularly volatile space — a victim of Silicon Valley’s close-knit, ‘move fast, break things’ investor culture, hoisted by indulging the whims of fickle California dreamers.
Then, at ferociously high speed, events deteriorated. Signature and Silvergate, two banks with exposure to crypto and other tech-focused lending, failed — perhaps not a huge shock to those who have followed the crypto crash and the downfall of Sam Bankman Fried’s crypto exchange and hedge fund FTX. Then Credit Suisse, a 166-year-old institution that was once an emblem of Swiss pride, was bought by its larger rival UBS in a rescue deal for a humiliating £2.6bn — less than the value of Greggs, the British bakers. A rout in banking stocks, spurred by the collapse of SVB, had brought Credit Suisse’s long-standing vulnerabilities into sharp relief and hurried its collapse, highlighting just how spooked investors are.
Last weekend, the head of the International Monetary Fund, Kristalina Georgieva, warned that the global economy faces ‘exceptionally high’ risks to its financial stability because of the turbulence in the banking sector. And Deutsche Bank, Germany’s biggest bank and one of the largest in the eurozone, caused jitters when its shares tanked a week ago.
Are we on the verge of a 2008-style financial meltdown? Two schools of thought prevail: one rattled; the other becalmed by the speed and certainty with which regulators have acted by pumping liquidity into jittery systems. Tests can be overcome. Financial crises on the scale of 2008 are exceedingly rare. False alarms have fizzled out before and regulation is much improved.
So how does all this affect you and me? ‘What we’ve seen from the reaction of central banks and authorities that guarantee our funds is that they move very, very fast,’ says economist Vicky Pryce, co-author of How to be a Successful Economist. ‘The real problem is that lots of investors have lost out. If you were investing in the banking sector — or if your pension was invested in the banking sector — the drop in value that we have seen recently is a concern.’
‘I think we should be worried,’ says Kenneth Rogoff, Harvard professor of economics, who has long warned that the world is sleepwalking towards ‘financial contagion’, when doubt about one bank’s assets spreads to another’s. ‘Financial crises go in waves. You remember the European debt crisis. First it was Greece. “But it’s only Greece,” they said. Then a couple of months later it’s Portugal. “But it’s only Greece and Portugal.” So, you shouldn’t just look a week later and say nothing else happened, all clear. It’s much easier to call a financial crisis in hindsight than to call it in the moment— you often don’t know where the bodies are buried until you see the stress.’
What about the domestic picture? The International Monetary Fund has said the UK will be the only G7 economy to shrink this year, which will likely kill struggling companies and hit jobs hard. The cost of further bank bailouts must eventually be passed on to the taxpayer: whatever the Chancellor might tweet, SVB UK is the exception, not a new rule. The era of dirt cheap credit is kaput for now. Moreover, the failure of a bank like SVB, one which was the go-to bank for a technology start-up company, could have a stifling impact on Britain’s innovation economy unless other challengers can step in. Tech businesses may withhold new hires, and staff who remain may respond in kind, cutting local spending or delaying home purchases or renovation work.
Let’s be honest. We have been here before. Bank bailouts. Centuries-old institutions — poof! — gone in a puff of smoke. ‘For all the analysis you can do, the power of panic is bigger than any number that you can put on it,’ says Rogoff. But this time, experts say, it’s different. ‘There’s always a fear that idiosyncratic events are indicative of a picture that we can’t see yet,’ says John Cronin, UK lead at financial analyst Goodbody. Yes, the next big danger can come out of nowhere, he says. Who’s next? What else is lurking out there? Could we see problems elsewhere? What are the unknown unknowns? ‘But I’m confident that the banks in my bit of the universe are in good shape,’ he concludes. ‘There’s no particular reason to worry.’
So don’t panic. Yet…