At first sight they could not be further apart, geographically and culturally. A bank serving the tech titans of Northern California and a grand institution that has been at the epicentre of Swiss banking for almost 167 years.
One exudes super-cool and dynamism, financing the products of Stanford and elsewhere with their fast-growing, world-changing ideas. The other stands for solidity and tradition. The only war the former has experienced is of the trade variety, between Apple and Microsoft; while the latter was witness to two terrible conflicts on its continental doorstep, never closing its doors, constantly providing financial security and a discreet service.
Yet, Silicon Valley Bank or SVB and Credit Suisse both imploded in a matter of days, just like that, and incredibly, given their differences, their collapses are directly linked.
It was the uber-trendy SVB that brought down the historic Swiss giant, doing for Credit Suisse what wars and numerous other crises could not manage.
Nothing illustrates the globally connected nature of banking more than their respective demises. Even Switzerland, the country above all others that prided itself on neutrality and sanctuary, was not immune to the tsunami that swept across the banking world once SVB signalled it was in trouble.
Banks are not like other businesses. They are not meant to go bust. They manage our money, and to do that they must obey sets of rules designed to prevent them failing.
But when one of decent size and reputation does go down, as SVB did, the shock is immense. The first reaction of people worldwide is to ask themselves, is my bank safe, is my money secure?
No amount of regulation, of soothing words from political leaders and central bank governors, can prevent this very human reaction. Our psychological make-up requires that in danger we look to ourselves, for survival, in the same way if there is a burning smell in a theatre, the audience will charge for the exits.
It can be illogical. There might be no fire or it could be a tiny fire that was easily extinguished – no matter, we’re not hanging around to find out.
That applies just as much to capital. And it’s not only individuals who want their deposits safe, where they can see them, it’s institutions as well.
In most cases, common sense does take over and once they’ve reassured themselves, they relax. But not in all instances. In those banks that had been the subject of murmurings before the first one went down, there is no holding back – folks and funds want their money and they want it now.
So, it was with Credit Suisse. The Swiss behemoth had been rocked by a series of management scandals in recent years. Its good name had taken a pounding, to the extent it could no longer be trusted. All that was required was a bank crash somewhere and the onset of contagion to tip it over the edge, to force its customers to withdraw their money.
Tellingly, they withdrew from Credit Suisse while other Swiss banks were unaffected, so it was not a reflection on the nation’s banking industry. Similarly, other banks of equivalent international stature, with the same range of activities, did not suffer. So, the problem was confined to Credit Suisse.
What this shows is that we must identify vulnerable banks sooner, before one falls and the domino effect begins. And vulnerability can take alternative forms: a business model that contains a higher degree of risk, which may be fine most of the time but not if other conditions kick in, such as raised interest rates, which is what hit SVB; an organisation that has been beset by weak leadership and cracks appearing, this was Credit Suisse.
The watchdogs must be tougher, better resourced, more rigorous in their application of the regulations. Hopefully, this crisis will put paid to the legions of bank lobbyists arguing for relaxation of the restrictions brought in after 2008.
We need, though, something else, which is steel in our collective spines. Credit Suisse was saved by a forced marriage with UBS, its arch-rival. The Swiss authorities, fearing for the harm a bust Credit Suisse would do to their national image as careful bankers, rushed to weld the two together. In their haste, they agreed that the Credit Suisse shareholders should be partly recompensed and holders of $17 billion worth of the bank’s bonds should get nothing at all.
Result: mayhem around the world as the usual order of debt first, equity second, on any insolvency pay-out is overturned. Thanks to the Swiss, $275bn of bank funding around the world is up in the air, with bond holders questioning where they stand.
At the very least, years of litigation look certain with those who lost out on Credit Suisse determined to get their money back. But what the Swiss have unleashed may go far deeper and have more serious ramifications.
The Swiss acted speedily because they had to – that tidal wave was hurtling inexorably towards them and they felt they had to head it off. But in reacting hastily, they cut corners and may have created a bigger, longer-lasting storm.
In 2008, our answer to crashing banks was to throw taxpayers’ money at the problem; now we’re avoiding that by persuading banks to make the bailouts. Desperate attempts are being made to shore up First Republic in San Francisco by a pool of US investment banks led by JP Morgan.
That is not perfect either. The reality after two such crises so far this century is that nothing is, which forces the stark conclusion that we should be prepared to let banks fail. It will be grim, but is there another solution? By acting tough, we will require bank executives to fall into line, to not do things to excess, to not play fast and loose with our money, possibly not to reward themselves such vast sums. We must let them go, otherwise nothing changes.
“Too big to fail” cannot be the abiding rule. With that comes the natural extension, which is “too big to jail”, and it grates still that no senior banker was even prosecuted, let alone imprisoned, for allowing their greed to almost send the world into financial meltdown in 2008. Four years later, incredibly, no HSBC banker was charged for allowing their bank to launder money for the Mexican Sinaloa drug cartel; instead, the bank was fined a US record $1.8bn, but that equated to only five weeks’ profits.
Here we go again. Bankers cannot expect us to jump in and rescue them. It does not happen in other industries; it should not occur in banking.