Banking crisis a catastrophe? No, a wake-up call, says HAMISH MCRAE

This is big, but it’s not a disaster. The banking crisis that rocked the world last week may prove to be just the thing to give the industry and the people who regulate it some sense.

Warren Buffett, the legendary American investment guru, famously remarked in his 2001 Berkshire Hathaway Chairman’s Letter, “You don’t find out who’s swimming naked until the tide goes out.”

Well, the tide turned when the dotcom bubble of 2000 burst, and with the banking crash of 2008-2009. Now it has failed again.

At some point, interest rates would always return to normal levels, and as we saw last September, some pension funds were stupid enough not to take that into account.

Now it’s the turn of the banking industry and the lesson here is that a run on a mid-sized company called Silicon Valley Bank was enough to trigger a global crisis.

UK authorities handled this well, with HSBC bailing out the London side. But history tells us that it will take some time before all the weak banks around the world are bailed out – or allowed to go under. We can’t see the details, but we can see, I think, some immediate lessons, some longer term lessons, and a possible opportunity.

The immediate lessons are clear. First, regulatory changes will require banks to hold larger reserves and a greater proportion of those reserves in the form of cash. That increases the cost of capital and can reduce the availability of loans. But that is the price to pay for a more secure banking system.

Subsequently, global interest rates need not rise as much as markets predicted, perhaps not much further. This is not because the central banks have become fearful or soft on inflation, although they should be chastised by what has happened.

Rather, it’s because we don’t need higher rates as much. The loss of confidence and the fact that banks will be more cautious with their lending will dampen economic activity in much the same way that even higher interest rates would have done.

Third, there is likely to be a dent in global growth. I see that the OECD has made gloomy predictions about the outlook for the UK, but I wouldn’t pay much attention to it. We are in a world where all predictions are swept away by events.

Much wealth has been destroyed by the crash of stock prices around the world, not just in the banking sector. It’s impossible to quantify how this will slow global growth, but it can’t be positive. Intuitively, I expect the UK to come through this year relatively well.

In addition to these direct lessons, there are some more nebulous themes. To begin with, there will be a mood swing in banking. There should still be funding for viable projects, but it will become more difficult to get bank financing. We have learned that even medium-sized banks can be systemic in that it can create a global crisis of confidence. So all banks will have to be clear that their first duty is to protect their depositors’ money. Better boring than bust.

Subsequently, this shift to normal interest rates is something we have to get used to and will have consequences other than putting pressure on badly run financial institutions.

If there is a long period of time when interest rates are higher than inflation, it will change attitudes towards money in general. It will be a climate of caution that will prevail in both business and finance. Companies will be penalized for having high gear. A welcome return to common sense, then: debt must be secured, while equity funds are at risk.

Third, there will be a real problem in getting financing for fast-growing or at least promising companies. There’s the long-standing problem of the divide between small-scale businesses that can rely on “friends and family” for funding, and those that can float. But that gap seems likely to widen, and it would be worrying if viable ventures were tapped for lack of capital.

That leads to the opportunity. There are many investors who want to take risks and play a role in supporting entrepreneurs. There have long been fiscal incentives to do just that, including venture capital funds and venture investment programs, but to generalize, the costs have been high and the results haven’t been great. That’s the challenge for UK financial institutions: finding more effective, low-cost ways to link the money to the business.