Credit Suisse, one of the largest banks on the planet, has been bailed out in all but name by the Swiss government to the tune of £44bn, with the promise of more to come if needed. For much of the last week, the Swiss giant had been hammered by speculation over its future after its management were forced to admit on Tuesday that its earlier accounts contained “material weaknesses”. Its share price plunged and, perhaps more ominously, the cost of insuring the bank against default soared into the stratosphere – implying those trading believed the bank had a very high chance of imminently defaulting.
Five days before, the California-based Silicon Valley Bank (SVB), a smaller-scale provider of banking services to the state’s huge tech industry, had failed, prompting a rush to bailout this bank by the US government early on Monday morning. Speculation has since swirled around America’s smaller, regional banks, with financial market traders believing that the combination of rising interest rates and (potentially) poor management choices that did for SVB may also now be afflicting other banks. Another, smaller institution, specialising in cryptocurrency lending, Signature Bank, ha, bad failed a few days previously. Smaller banks, like SVB and First Republic, had their regulations substantially relaxed in 2018, allowing them to take greater risks with their assets. This has left them especially exposed as interest rates have increased, and their customers are withdrawing money to place it in larger institutions.
As of this morning, demands for emergency funding support from banks to the US central bank, the Federal Reserve, have exceeded those at the peak of the global financial crisis of 2008. $165bn has been taken by banks from the Fed in the last few days, indicating significant strains in the system amongst the US’s regional banks. One of those, First Republic, after days of plummeting share prices, was rescued by a consortium of 11 bigger US lenders, which injected the stricken bank with $30bn. Shares in the US and across the world have rallied on the news.
For those of us who watched the rolling crisis of 15 years ago, culminating in the collapse of Lehman Brothers in September 2008, all this has an uneasy familiarity. Were Credit Suisse to fail, it would be a financial event of comparable magnitude, opening up a black hole in the global financial system as the bank’s £1.15tr balance sheet imploded, sucking in the rest of the system behind it. Banks of this size and scope get called “systemically important” for this reason – a failure could wipe out the whole system, or at the very least make it dangerously unstable. But it also makes those banks, in another bit of jargon, “too big to fail”: governments and regulators across the world know that a bank this size simply cannot be allowed to collapse. Once Credit Suisse’s biggest shareholders, Saudi National Bank, let it be known that they would not be willing to pour more funds into the stricken lender, it was only a matter of time before the Swiss authorities stepped in.
That pledge of government support has almost certainly bought Credit Suisse a reprieve, with its share price rallying sharply on the news. We’re not likely to face a literal repeat of 2008 – apart from anything else, government, regulators and the institutions themselves are now significantly more attuned to the kinds of dangers and risks that became so apparent back then.
But this is fighting the last war. The relative stability, at least in the Global North, of the late 2000 economy has been replaced by faltering growth, soaring inflation, and – ominously – repeated geopolitical and ecological shocks, of which Russia’s invasion and Covid are simply the largest and most obvious.
We’ve also had, since 2008 and until very recently, an extended period of exceptionally low interest rates and “quantitative easing”. Money has been “cheap”, at least for financiers, venture capitalists, and the larger financial institutions – not so much for the rest of us – and this has encouraged some peculiar behaviour. For a long period of time it was possible for any number of not especially smart investments to attract funding, as long as they looked a bit techy, or could pretend to be associated with the sector in some way. WeWork was an obvious example here. WeWork was effectively a landlord, but one loaded up with weapons-grade tech/hippy bullshit, the company managed to implode ahead of its attempted record-breaking stock market sale in late 2019. But as inflation began to dig in, in the wake of the covid outbreak, those days of cheap money have come to an end, major central banks across the planet driving up interest rates. The rise in rates has, in turn, started to expose a substantial number of investments that made sense when money was cheap, but now threaten to turn bad.
These unexploded bombs lie scattered across our economies. You might remember the “mini-Budget” last September, when Kwasi Kwarteng’s attempt to borrow billions more than anticipated, unexpectedly slashing taxes for the rich, spooked traders and sent the value of the pound spiralling downwards just as government borrowing costs shot up. Over the weekend, it had become apparent that Britain’s pension funds had spent the last decade or so of ultra-low interest rates busily digging themselves into complex combinations of financial derivatives known as “liability driven investment” that would help them manage low interest rates – but which would blow up if interest rates moved suddenly, as they did. Pension funds were at risk of becoming insolvent – that is, they would not be able to meet their obligations to pay their members – and so the Bank of England organised its own mini-bailout for them.
That’s likely to be the pattern across the world if interest rates continue to rise. The Global South is also on the hook: very significantly increased debt piles during the 2010s, as countries borrowed at low rates of interest, would become unmanageable at higher interest rates. Already, five countries have defaulted on their debts since Covid, with the International Monetary Fund reckoning another 85 are close to doing the same. Crushed by rising prices, notably for food, and rising interest rates, the year ahead could be very rough for the world’s poorer economies.
But precisely because rising rates have revealed such fragility in the system, and because no-one can say for sure where the next unexploded bomb lies, the pressure will now be on the Federal Reserve and other major central banks to ease back on their rate-hike programmes. This is by itself not an entirely bad thing: ultimately, the drivers of high inflation across the world have little to do with anything affected by interest rates, including (in the last year) Russia’s invasion of Ukraine, extreme heat in Europe and North America, and poor harvests (such as, notoriously, for tomatoes) on the back of worsening and erratic weather. Climate change won’t be halted by the Bank of England changing its base rate; it’s unlikely even Vladimir Putin is particularly swayed by it.
But if the sense of fragility grows, so, too will the unwillingness of banks to lend. Financial institutions either dependent on government support or desperately worried that they will be the victim of the next speculative attack are unlikely to rush to make loans. And if banks start pulling back on their loan-making, it’ll feed into the wider recession, since it means projects and investments that might once have got funding now won’t. Credit Suisse probably won’t collapse – there’s far too much at stake – but it’s hardly a sign of healthy system that one of the world’s largest financial institutions will be reduced to a “zombie bank” state, dependent on direct government support. Another large financial institution might take the still-profitable parts of it over, much as HSBC bought Silicon Valley Bank’s UK branch for £1 last weekend.
Either way, it looks like a further mutation of capitalist economies, hit by multiple crises, away from the free-market model of the recent past and into this strange new state-supported variant – in which billions are pumped by governments into industries considered strategically important, like semiconductor manufacturing, whilst zombified financial institutions lumber about, kept alive only by the promise of unlimited government support.
The stakes can rise rapidly in a situation like this. If banks fail, savings are lost and payments systems fail. The primary function of a central bank, whether the Federal Reserve or the Bank of England, is to preserve financial stability. If this primary task conflicts with the demand that they must also try and keep inflation low, central banks should be focused on their primary function. This means, in practical terms, that the fairly useless programme of interest rate rises must be halted and support given to banks as needed. But this should not come at the expense of wider society: failed banks can be brought into public hands, but losses should be pushed on to their owners and bondholders. As things stand, the infamous pattern of 2008 – of privatised profits, but socialised losses – looks set to repeat itself.