Bail out for Wall Street, none for Main Street
The World Around Us
March 24, 2023
Bail out for Wall Street, none for Main Street

In recent weeks, two developments on different sides of the Atlantic have rocked global financial markets. In the United States (US), Silicon Valley Bank (SVB) collapsed. Over in Europe, the Swiss banking giant – Credit Suisse, also collapsed.

SVB provided financing for nearly half of US venture-backed technology and health care companies. In addition to this, like other banks and financial institutions, it also invested heavily in usually reliable US government bonds.

Ramishah Maruf and Tiffany Baker, writing for CNN Business, provided a snapshot of the factors which led to the demise of SVB. Apart from buying up cheap US government bonds, SVB also saw a massive increase in deposits from technology startups.

Between the end of 2019 and 2022, SVB deposits increased from US$62 billion to US$198 billion.

According to Maruf and Baker, following these developments at SVB, the US Federal Reserve (Fed) began “aggressively hiking interest rates”. As these rates rose, bond rates fell. Higher interest rates also raised the cost of borrowing for startups, meaning that their funding dried up. As funding dried up, startups then had to turn to their savings at SVB to finance their operations.

To compensate for bond losses and the run on the bank by depositors, SVB had to sell off its securities, mostly at a loss, to strengthen its balance sheets. Companies then panicked and withdrew their money from the bank. Ultimately, US regulators had to intervene and place the bank under receivership.

In the case of Credit Suisse, its demise has been more closely linked to some key human defects – poor management and greed. Unlike SVB, Credit Suisse largely remained well capitalised. However, commentators such as Matthew Allen, point to a “catalogue of errors and scandals over the years” which eventually undermined market confidence in the brand.

According to Swiss Trade Union Confederation chief economist Daniel Lampart, Credit Suisse “bungled, took risks they couldn’t control and made insane amounts of money doing it”.

Both SVB and Credit Suisse have since been bailed out by the US and Swiss governments respectively. In the case of SVB, the US government stepped in to guarantee deposits. In Switzerland, the Swiss government forced through a takeover of Credit Suisse by another Swiss Bank, UBS. The collapse of SVB and Credit Suisse are the most significant developments in global financial markets since the collapse of US financial behemoths Lehman Brothers and Bear Sterns, which precipitated the global financial crisis nearly 15 years ago.

According to Janet Yellen, government’s decisive actions have calmed banking turmoil.

While noting that more bank rescues are possible, Yellen has also emphasised that the current situation differs from what took place during the global financial crisis some 15 years prior.
Whether this is the start of a new financial crisis, no one knows for sure.

Notwithstanding Yellen’s remarks, history would suggest that current financial market developments linked to SVB and Credit Suisse merit concern. As the law of dominoes goes, once one falls, the others tend to fall also. However, if we were to follow an ancient proverb, one swallow (in this case, two banks) does not a summer make.

Essentially, while the situation around SVB and Credit Suisse could lead to a broader crisis, it is simply too early to tell. Nonetheless, there is no harm in central banks, regulators and governments around the world choosing to have contingencies at the ready should the worst happen.

However, the fact that we are in this situation again, in a relatively short space of time since the last financial crisis, does suggest that perhaps some or many of the underlying problems which contribute to or cause these events remain unaddressed. This brings into question whether more reforms are needed, as well as the nature of such reforms.

Unfortunately, the majority of us on Main Street must look on again, perhaps grudgingly, at another bailout for Wall Street. We are still waiting for bailouts on Main Street to address social safety nets and close the inequality gap.

Joel K Richards is a Vincentian national living and working in Europe in the field of international trade and development.