Rocky ride lies ahead after bailouts ease fears of new financial crash

The specter of Lehman Brothers is stalking the markets again. Fifteen years after the US lender collapse triggered a global economic recession, a new banking crisis has unfolded with frightening speed.

In recent days, lifeboats have been launched on both sides of the Atlantic to save distressed shores. It follows the sudden collapse of Silicon Valley Bank, the 16th largest in the US, following a classic bank run that saw depositors raise money en masse.

The British branch of Silicon Valley Bank, a lender to thousands of technology companies, was picked up by banking giant HSBC for a pound.

As panic spread, two smaller US lenders – Signature and Silvergate – also shut down, before the San Francisco-based First Republic was bailed out by a group of Wall Street banks in a £25bn bailout.

But it was the plight of Credit Suisse – a much larger bank considered ‘systemically important’ to the global financial system – that overshadowed everything.

Credit Suisse, Switzerland’s second-largest bank, saw its share price plummet to a new low as contagion fears mounted, despite Swiss authorities throwing the lender a £45bn liquidity lifeline. It is now for sale.

Nouriel Roubini – the economics guru nicknamed “Dr Doom” for predicting the 2008 crash – called the situation in Credit Suisse a “Lehman moment” for global markets. That the chairman of Credit Suisse is Axel Lehmann (no relation) provoked parallels. But that’s where the similarities end, say experts. Unlike in 2008, this wave of jitters started not in the US, but in the rapid rise in global interest rates to combat inflation fueled by skyrocketing energy prices.

Investors are dumping so-called “safe” government bonds – or IOUs – as a series of central bank interest rate hikes yield better returns. That has eroded the value of bond holdings in large banks, which they use to offset “riskier” investments.

The first sign that all was not well came in the autumn when British pension funds were forced into a forced sale of government bonds – or government bonds – following ex-Chancellor Kwasi Kwarteng’s disastrous mini-budget. The sell-off revealed huge amounts of previously hidden loans in the pension system. The ship was not stabilized until the Bank of England stepped in with a £19 billion bailout.

So how safe are our banks? Rules introduced in the aftermath of the latest crisis were designed to make them more resilient to shocks and prevent more taxpayer-funded bailouts. Banks around the world built cushions of capital—rainy day money—to absorb losses, either on blind loans when the economy faltered or on bad bets like government bonds. But under the Trump administration, these rules were relaxed for regional lenders like Silicon Valley Bank and First Republic.

Dr Doom: Nouriel Roubini foresaw the 2008 crisis

Former Bank of England deputy governor Paul Tucker warned US authorities in 2019 that easing funding requirements would lead to tears. As US banks begged for bailouts, he told The Mail on Sunday, “Nobody cares about stability until they’re screaming for help.” Sir John Vickers – former Bank of England chief economist and architect of UK banking reform – thinks UK lenders need more capital in their funding structure.

An analysis by The Mail on Sunday found that the ‘big four’ banks – Lloyds, NatWest HSBC and Barclays – reduced their capital buffers last year as they showered shareholders with billions of pounds in dividends, share buybacks – and, of course, overburdened themselves with bumper bonuses.

Big banks collectively earned £40bn in net interest income by 2022 – the difference between what they charge borrowers and pay depositors. This has angered depositors, but it has also made banks more robust. Chancellor Jeremy Hunt said last week: ‘British banks are well placed to deal with this volatility. The wider banking system in the UK remains safe, sound and well capitalised.” What happens next depends on how regulators and policymakers respond. Central banks are caught between a rock and a hard place, analysts say.

“They are still super nervous about high inflation, but new rate hikes risk creating new financial instability,” said Hargreaves Lansdown’s Susannah Streeter. Others insist on overreacting.

“Now is not the time for tighter regulation,” said Tim Congdon of the Institute of International Monetary Research. “In any case, capital requirements should be relaxed.”

Central banks should make loans available to banks that are “essentially solvent,” he added. The last thing we want is a repeat of 2007-2008. When banks were forced to hold more capital, they stopped lending and the global economy plunged into recession.’

Ultimately, banks depend on trust for their very existence. Credit rating agency Moody’s said in a recent note to clients, “If confidence is pierced, contagion can be swift.

‘Bank balance sheets are often complex and opaque, with interrelationships and risks that are often only known in retrospect.’

The inflation shock and rapid interest rate hikes are likely to have “further impacts on the financial sector,” it concluded.

In other words, expect more catastrophic moments in the choppy seas of high finance. It shouldn’t be necessary to jump overboard, but keep a lifejacket handy just in case.

We MUST go back to old-fashioned bank values, says DAVE FISHWICK

Here we go again!: Dave Fishwick, van salesman turned millionaire and founder of the Bank of Dave

Oh no, here we go again! I woke up early in the week to learn that a lender – Silicon Valley Bank UK – had been sold for a pound.

Had I known they were selling sofas so cheaply I could have saved myself millions of pounds and ten years off my life. And I would have doubled the offer to £2.

The week ended with another lender, Credit Suisse, taking hold of a £45bn bailout from the Swiss central bank.

Banks had to be made fireproof after the financial crash of 2008 when we, as taxpayers, had to bail them out. So how the hell did we end up in another banking crisis?

In my opinion, we need tighter control of the big commercial banks to prevent more bankruptcies and to change the bonus culture.

But these regulations and legislation must be proportionate so that smaller banks – like my Burnley Savings and Loans, aka ‘The Bank of Dave’ – don’t get caught up in endless red tape and bureaucracy.

Crucially, we need more competition from smaller, simpler, community-based lenders who can grow into the safe and sound banks of the future. Without meaningful competition, the big banks continue to serve us poorly. As they continue to close hundreds of branches every year, excellent staff are lost.

The personal touch has disappeared and vital local knowledge and understanding of a community is under threat. How can a head office 300 miles away decide on a florist business in Accrington with no knowledge of the area or the people involved? Where does this all end?

Well, I was pleased that the Prime Minister spoke so positively in Parliament this month about Burnley Savings and Loans and the need for more community banking. We’ve loaned over £30 million to thousands of people and businesses across the UK, helped savers get the best interest rates on the high street and given all our profits to charity.

And, unlike mainstream banks, we did it without taking furlough money, demonstrating conclusively that we are fit and able to run a financial institution.

Of course I would say this, but we really need to make sure there can be more Bank of Daves!

The award-winning docuseries Bank Of Dave has been remastered by Netflix and will be streaming on the platform from Friday.