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Bank failure: Speculation is systemically important

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Bank failure: Speculation is systemically important

Fear for the deposits: customers queue in front of the headquarters of the Silicon Valley Bank (SVB) in Santa Clara

Foto: dpa/Li Jianguo/XinHua

The near-bankruptcy of a medium-sized bank in the USA is shaking the global financial markets and making it onto the German evening news. In order to prevent a financial crisis, the US authorities take over the bank and secure its deposits – and for once the arch-liberal business newspaper “Economist” and the left-wing magazine “Jacobin” agree: Here again the state is saving a bank that has been “frivolously” lending and “irresponsible” business practices had fallen into crisis. What is remarkable about the case, however, is less individual misconduct. On the contrary, the fact that the bank’s difficulties are shaking the global financial system shows that this is not a special case.

The starting point of the quake is the Silicon Valley Bank (SVB), formerly the sixteenth largest bank in the USA. In the course of a rush of customers, it was taken over by the authorities on March 10th. The US President personally felt it was necessary to reassure bank customers and the financial sector: “Every American can rely,” says Joe Biden, that his bank deposits are safe and wages and bills can be paid on time. But the reassurance was short-lived. On March 12, another mid-sized bank, Signature Bank, was shut down. Earlier this week, bank stocks and the US dollar continued to fall. The “general market skepticism towards banks” caused the price of the major Swiss bank Credit Suisse to collapse on Thursday.

The SVB crisis comes at the end of a long chain of speculative transactions that also began in a crisis: In the years after the Great Financial Crisis from 2008 and especially during the Corona crisis, the US central bank bought US government bonds in bulk to reduce their prices up and lower interest rates. Low interest rates should keep US debtors solvent and get them through the difficult times.

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In view of the low interest rates, huge sums of investment money flowed into riskier investments in the search for higher returns on the financial markets. Pension funds, corporations, and mutual funds poured hundreds of billions into venture capital funds. They, in turn, invested some of the money in Silicon Valley’s high-tech start-ups — young, loss-making, fast-growing companies that investors hoped would one day become the new Google, Twitter, or Uber and make them rich .

Why safe investments are not safe

2021 was the fat year: 620 billion dollars flowed into start-ups in the technology industry worldwide, twice as much as in the previous year and ten times more than in 2012. The center of this wave of speculation was California’s Silicon Valley. The companies there parked their inflowing billions, especially with the SVB. Their deposits quadrupled between 2017 and 2021 to $190 billion – and that gave SVB a problem: where to put all that money? After all, a bank is not a piggy bank, it has to make money. To do this, they have to issue loans themselves. The SVB did that and bought the safest investment in the world: US government bonds, which were very expensive at the time and hardly brought any returns. At the time, this was considered unproblematic. But then came inflation.

To combat rising inflation, the US Federal Reserve raised interest rates in record time. This, however, devalued the low-yielding US Treasury bonds held by SVB. Why? Because the price of financial assets is derived from how much return they bring. When interest rates rise, the prices of low-interest securities automatically fall. Because compared to the new, higher-yielding securities, they are becoming less attractive.

So the SVB recorded billions in losses on the bonds in its portfolio and got the feeling that there is no security on the financial markets. In retrospect, the bank management is accused of pursuing a reckless investment policy with the purchase of US government bonds, and that they should have expected interest rates to rise. However, this accusation is cheap. Because interest rates have been trending downwards for decades, and there was general consensus that that with weak growth and low inflation, “interest rates will remain low for the foreseeable future,” wrote former IMF chief economist Olivier Blanchard in 2019.

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But things turned out differently. When SVB’s losses became known, its customers – the start-up companies – reacted by withdrawing their deposits. And at lightning speed, they pulled $42 billion from the bank in a single day. The start-ups’ panic was fueled by the fact that they themselves had fallen out of favor with their backers – the venture capital funds. In view of high inflation and the threat of recession, the speculative flow of money into Silicon Valley had already dried up in 2022, leading to a “tech crash” on the stock markets. The flow of money from which the start-ups live and from which they finance their billions in losses had dried up. Then, when their bank, the SVB, ran into turmoil, they hastily raided their accounts.

In theory, the bank would have had sufficient funds to finance the outflow of funds. But to activate these funds, she would have needed time – and that was no longer there. The SVB’s downfall was therefore less its own investment losses than its customers: young, fast-acting companies that were under pressure from their own investors. To make matters worse, in the event of bank failures in the USA, customer deposits are protected by law up to a maximum of $250,000. $250,000 – that’s enough for normal private customers, but not for the start-ups, some of which had hundreds of millions in their SVB accounts. As a result, more than 90 percent of deposits with the SVB were not covered by statutory protection.

profiteers and losers

In order to prevent a chain reaction, the US authorities have taken control of the bank, guaranteeing all deposits and granting the rest of the banking sector cheap loans from the central bank, which distributed 300 billion dollars to the financial institutions in a few days. “That should have massively reduced the risk of a run on other banks,” said Commerzbank. The US government will not allow a crisis of confidence because confidence is the basis of speculation and this speculation in turn is the basis for the prosperity of the so-called real economy, especially in the important technology sector. After all, the US government has declared America’s »global technology leadership« to be one of its goals. To do this, it needs the support of investors. Their speculation is systemically relevant.

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Who will benefit from the bailout? The big US banks to which former SVB customers are defecting; the start-up companies whose deposits are secured; and the venture capital firms that have pumped billions into the startups.

Who is paying? According to the current status, not the US taxpayers – the money for the customer deposits should flow from the sale of the SVB fixed assets. If that is not enough, the remaining costs are passed on to all banks. The SVB managers have to pay, they lose their jobs, as do the SVB shareholders, whose shares have become worthless. The bank’s creditors will also have to forego claims.

But the employees also have to pay – not just those at the bank. A wave of layoffs has been rolling across the entire US technology industry for months: In the last three quarters of 2022, more than 600 start-ups and technology-oriented companies laid off employees – from the electric car manufacturer Rivian to TikTok, Twitter to the delivery service Getir and to the Facebook parent Meta, which this week announced the layoffs of a further 10,000 workers. Companies are slashing their payrolls, holding workers accountable for reviving speculation on America’s technological leadership. The program works: In response to the layoffs, Meta’s share price rose seven percent on Thursday.

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