ALEX BRUMMER: Banking turmoil not over

Since last month’s outbursts, which brought the bankruptcy of Silicon Valley Bank (SVB), Signature, an emergency merger for Credit Suisse with UBS and a dangerous loss of confidence in Deutsche Bank, there has been a quiet complacency in the financial markets.

Those who have experienced previous banking crises will recognize that there is often the calm before the next storm.

More than a year passed between the 2007 collapse of Northern Rock and Lehman Brothers, but beneath the surface, the tectonic plates in global finance were shifting as exotic financials, built on low-value, sliced ​​and diced subprime mortgages, were found to be worthless.

The current disruption in the banking and credit markets is of a different nature.

After a decade and a half of super-low interest rates and money printing, a sharp rise in global inflation required a sharp U-turn from central banks.

The potential to collapse existing financial structures was demonstrated in the UK by liability-driven investments (LDIs), which exposed a weakness in the Bank of England’s supervision.

The magnitude of the bailout, which this time has come to the financial system due to glaring regulatory holes and audit blunders, has gone largely unnoticed.

Despite assurances that taxpayers’ money would never again be endangered, the International Monetary Fund reveals in its financial stability report that the Federal Reserve has already committed $400 billion to the banking system to keep it liquid.

This is in addition to the cost of bailing out SVB’s top ten creditors with $13 billion in deposits, including established technology names such as streaming pioneer Roku and online gaming outfit Roblox.

Federal deposit insurance is designed to bail out smaller businesses and individuals, not digital titans.

The IMF is by no means confident that the turmoil seen so far is the end of the matter. It describes confidence in the financial system as fragile and fears breaches seen so far could be a “harbinger” of worse.

It is particularly concerned that there are mismatches between the liabilities (loans granted) and the liquidity of assets (instant cash) in the banking system.

Just as LDIs exposed a gap in the pension system, the high level of leverage by non-banks in private equity and real estate represents a huge potential exposure. The failure of Richard Branson’s admittedly esoteric Special Purpose Acquisition Vehicle (SPAC) Virgin Orbit is a case in point.

What is equally alarming is that despite all the stilted rhetoric about regulators controlling the situation, they are essentially firefighters.

As was the case during the great financial crisis, it needs huge help from the US, Switzerland and other authorities to put up barriers to hold back a wave of failures. So far so good. But wildfires have a nasty habit of spreading wildly.

Wrong choice

The CBI kept its word and quickly completed its investigation into Director General Tony Danker’s conduct, firing him without compensation.

That sets a good precedent for Britain’s boardroom, where corporate executives often leave in disgrace with big checks.

Payouts for failure are bad enough, but payoffs for when behavior falls short of expectations are unforgivable.

Whether the CBI’s decision would hold up in a legal battle is a matter of speculation.

The choice of what is effectively an internal candidate, economist Rain Newton-Smith, who spent nine years at the CBI before briefly working at Barclays, is opportune.

It should not be forgotten, however, that entirely separate allegations of sex, drugs and rock ‘n’ roll, including an alleged rape at a boat party, occurred when Carolyn Fairbairn, now a Lady, was in the hot seat. She says she handled the complaints robustly.

What the CBI really needs right now is a high-profile businessman capable of teasing the dissidents. Speed ​​in choosing a successor may have been the order of the day, but steady progress is not the answer.

PR offer

You can never be quite sure whether having KKR as an investor is a good thing or a bad thing.

Nevertheless, the expansion of FGS, better known in the city as Finsbury, places a potential value on the $1.5 billion communications outfit and heralds an eventual IPO.

Founder-chairman Roland Rudd must ensure that there is at least a double listing. After all, this is a company with distinctly British roots.