The words ‘bank’ and ‘panic’ go together far too easily

There seems to be a constant state of surprise when institutions run into trouble, but it shouldn’t be this way

There’s nothing here that was not entirely predictable (AP)

Suddenly, it’s all about banks. You could be forgiven for supposing that no other forms of business exist; no other enterprises can go under. That only banks matter.

It’s true that if automobile manufacturers were hitting the buffers or drinks companies were in crisis, there would not be the same attention, nor the same global angst.

That’s because it is correct to say that banks matter more than most. That they provide the lubrication that allows the rest of the world to function smoothly. If the banking system seizes up, markets freeze, and economic activity everywhere shudders to a halt.

So yes, governments and regulators are correct to go into overdrive and do everything in their power to stop this from happening. The lesson from previous crises, with the last one only 15 years ago and still fresh in the memory, is the need for speed. Action must be taken before a bank goes down, to provide reassurance and prevent a knock-on effect.

That’s been realised, too, not only by the various authorities but by the bankers themselves. If they wish to save their bank, to protect their own jobs, they must stave-off sectoral armageddon. They must jump to rescue the banks that are failing.

All of which sounds straightforward, easy almost. The problem is that both sides, officialdom and banks, are also to blame for what is occurring.

Put it this way: if Silicon Valley Bank (SVB) had not been allowed to run up large positions in US long-dated government bonds then it would not have got into so much trouble; likewise, Credit Suisse has been dogged by scandal and weak management for years, yet not enough was done.

In SVB’s case, it was well-understood that if interest rates rise, the value of the bonds falls, but it was allowed to carry on regardless. Then rates duly rose as central bankers attempted to get on top of inflation and SVB was left nursing large losses. Worse as well, it was hit by some large depositors withdrawing their cash.

There’s nothing here, however, that was not entirely predictable. The two responsible parties, the regulator and bank staff, sat back and did nothing to reduce the risk.

Once the first bank goes a giant game of Whac-A-Mole begins, with all eyes scouring for the next one to appear in trouble. SVB was bailed out in the UK by HSBC, which nipped in smartly and turned one bank’s misfortune to another’s opportunity, and snapped up virtually the entire UK tech sector as customers. In the US, the Federal Reserve moved to guarantee all the deposits, removing the usual limits.

As SVB was being saved, neighbouring and larger First Republic was identified as vulnerable to the fallout. A consortium of giant US investment banks mounted a swift mission to pump in tens of billions of dollars and underpin its base.

With shareholders anxious to reduce or exit completely banks in case they were left high and dry – the SVB shareholders receive nothing, unlike the depositors who get their money back – the Whac-A-Mole players alighted on Credit Suisse.

The Swiss bank would have been on the most vulnerable “watch list” well before SVB’s woes sparked this crisis. Successive managements had failed to get a grip and Credit Suisse was lurching from one embarrassment to another. But for the fact it was thought too big to fail and had the reach to bring down the Swiss economy, it might have been taken out long ago.

But Credit Suisse is a historic pillar of the Swiss banking industry, a Swiss institution. So, its foibles and failings were tolerated. What changed was the ripple effect from SVB and the prospect hardening that the Swiss giant really could topple and with it, Switzerland’s wealth and historic reputation for being a safe financial haven for others.

Credit Suisse’s arch-rival UBS did its patriotic duty (and behaved out of self-preservation) and stepped up to buy it.

The relief so far is that there is not an endemic reason for the banks to be crashing or threatening to crash. In 2008, it was defaults on sub-prime loans in the US that affected several banks that had created derivative products on the back of this lending. There’s no equivalent this time, except that the rise in interest rates has changed the outlook for many banks and is causing them to revise their modelling.

Nevertheless, trying to soothe nerves when companies can’t get cash to pay their staff and suppliers and individuals form queues to extract their savings is an impossible task. It’s not helped by our living in an age when respect for governments has plummeted. No matter what calming words they use, they’re not believed and the withdrawals and lines of anxious customers continue to grow.

That’s why banks are vital: they hold our money, ours and everyone else’s. It’s human nature to recover what we’re owed and before it’s too late.

Unlike other businesses, banks are not meant to go bust. When they do, albeit rarely, mass panic is the inevitable result. The key is that they must not go bust.

That’s where governments and banks have to do more. The irony of this current maelstrom is that it occurred at the precise moment pressure was being applied for restrictions, introduced after 2008, to be relaxed. They should not be and this is the proof.

We must pay closer attention to financial risk, so that any bank which is following a policy different from others is subjected to more rigorous scrutiny. Regulators asking questions of SVB sooner, and demanding firm answers, may have avoided its failure.

As well, we should listen less to bank lobbyists. Regulators must stick to their guns. No excuses, no let-offs. Banks are always telling us how special they are. Well, the last fortnight has shown that to be the case, but not in the manner they would like.

Chris Blackhurst is the author of ‘Too Big to Jail: Inside HSBC, the Mexican drug cartels and the greatest banking scandal of the century’ (Macmillan)