Trump, Federal Reserve, Biden, Putin and the coronavirus behind the US banking turmoil

Rodney Alfvén, Head of IR and Transactions at Hallvarsson & Halvarsson, looks at the recent turmoil in the banking sector. What was behind it? What are the lessons to be learned? How can effective and trustworthy communication prevent this kind of collapse? And what does he see as the regulatory consequences?

Rodney Alfvén

Senior Director, Practice Lead IR & Transactions / Corporate Communications, Partner

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Rodney Alfvén, Head of IR and Transactions at Hallvarsson & Halvarsson, looks at the recent turmoil in the banking sector. What was behind it? What are the lessons to be learned? How can effective and trustworthy communication prevent this kind of collapse? And what does he see as the regulatory consequences?

When I woke up on the morning of March 9, I thought it would be a fairly ordinary day, with the usual client work, routine stock market monitoring, and perhaps some regular meatballs for dinner. Little did I know how wrong I was.

On the evening of March 8, Silicon Valley Bank had issued a press release with the somewhat uninspiring title, “Q1 23 Mid Quarter Update.” However, that announcement would seal the fate of the bank within hours.

In essence, the message conveyed that the bank had incurred losses of approximately $2 billion due to the sale of securities and that it planned to raise an additional $2 billion in new capital. As March 9 dawned, customers panicked and withdrew roughly $42 billion on the spot, equivalent to about 20 percent of the entire balance sheet. Naturally, SVB didn’t have that much cash just lying around; to meet these withdrawals, it would have to sell off securities at a significant loss.

As a result, the bank’s saga came to an end on Thursday, and the authorities took control. Over the weekend, there was a flurry of activity aimed at salvaging the situation, including the possibility of a sale. However, these efforts proved unsuccessful, leading to the rapid liquidation of the bank, allowing customers to withdraw their funds as early as Monday. As a precaution, authorities also took control of another bank on Sunday, Signature Bank, a cryptocurrency-focused institution. A third bank, First Republic Bank, was also saved over the weekend through liquidity guarantees from institutions including the Federal Reserve. A common thread among these three banks was that Alecta was one of the largest owners, by a significant margin.

As if that weren’t enough, Credit Suisse collapsed the following week and was forcibly taken over by UBS.

How did all of this transpire?To understand it, we need to consider the roles played by Trump, the Federal Reserve, Biden, Putin, and the coronavirus. When the Trump-administration took office in 2017, it initiated the deregulation of significant portions of the banking sector, relaxing balance sheet structure requirements.

This resulted in, for instance, SVB’s balance sheet carrying immense risks, with substantial deficits (equivalent to its entire equity), and a heavy concentration of assets (primarily securities) with extended maturities. Meanwhile, deposits (the other side of the balance sheet) had extremely short durations, allowing customers to withdraw funds with just a few keystrokes. I had never examined SVB before its demise, but a quick look at its accounts revealed a deeply problematic situation.

This predicament converged with a perfect inflationary storm in 2020-2021. The Federal Reserve printed vast sums of money to keep Wall Street content, while Joe Biden injected substantial funds to maintain Main Street’s (i.e., taxpayers’) contentment. In 2020 alone, the number of dollars in circulation surged by about 30%, a trend mirrored in the Swedish krona.

Basic Economics teaches us that an increase in the money supply drives inflation. However, central banks worldwide pursued a different agenda. This surge in the money supply heightened risk appetite, enabling many companies, especially in the tech sector, to secure capital for increasingly risky ventures from investors eager for returns on their newfound funds. This influx of capital initially flowed into banks, with much of it ending up at SVB, where deposits ballooned from $55 billion to $186 billion over three years.

Simultaneously, the disruptions caused by the coronavirus led to supply shortages, further fueling inflation. Then, when Putin invaded Ukraine, energy prices skyrocketed, igniting a perfect inflationary firestorm. This prompted the same central banks that had fueled the inflationary fires of 2020-2021 to scramble to extinguish them, albeit with limited success thus far. Instead, they managed to sow panic in the financial markets, particularly in the bond markets, which formed SVB’s primary assets and are typically seen as the safest securities. In 2022, fixed income markets experienced their worst returns in 102 years.Now, the actions of central banks, with willing assistance from figures like Trump, have unleashed chaos in the banking system, resulting in the second and third largest bank collapses in U.S. history. In their own way, central banks have made history, albeit perhaps not in the manner they had envisioned a few years ago.

What lessons can we derive from this?

  1. I have pointed fingers at central banks and authorities, but, of course, responsibility also falls heavily on investors who stop counting and instead pour money into increasingly risky projects.
  2. After the financial crisis, all bankers, politicians, and regulators aimed to create a banking system that would never need government bailouts again. We can now state that it has failed, largely due to Trump’s deregulation, and the authorities have been forced to take ultimate responsibility for the bailouts.
  3. In a way, the risks have increased dramatically in the banking system because customers can now switch banks at the touch of a button, and they are demonstrably willing to do so.
  4. Today’s regulations, created after the financial crisis of 2008-2009, are clearly not enough, so we should expect significantly more regulations, probably mostly related to liquidity, as this is what has failed..
  5. As a communications consultant, I can state that no crisis communication in the world can save a bank that ends up in the same situation as SVB, for example. However, preventive work is incredibly central. Make sure to communicate in a way that all interest groups feel safe, including politicians, regulators, owners, investors, customers, and staff. All of these must have total confidence in what the company stands for, that it is a safe and secure port with a solid business model that can also cope with external crises.

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