The worst year for banks since 2008 | FT Film

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This is the most intense period for the global banking sector for 15 years.

I don’t think it’s unfair to say there was outright panic.

I start getting text messages from friends and family saying is something going wrong? That’s not generally a good sign.

The bank comes out with this announcement, and all hell breaks loose.

It was complete carnage. It was chaos.

Friday morning, we’ve got a live bank. Midnight Friday, dead bank.

When you go back and look at this period, there is a ‘madness of the crowds’ aspect to the story.

I had a really bad gut feeling. And I thought, wow, I haven’t felt like this since 2007 and ’08.

The roots of what went wrong for a lot of these banks in March 2023 really go back to the era of zero interest rates.

Interest rates across the world have been at rock bottom, and in some places negative, for a long time to try and stimulate the economy on the back of the global financial crisis.

With zero-interest-rate policies prevailing in the US, all of a sudden very risky, no-profit but fast-growth start-ups look like a great bet. There was a proliferation of start-ups. It meant that there was a proliferation in venture capitalists funding those start-ups. There was this flood of money that came into the tech sector. And ultimately it washed up on the shores of Silicon Valley Bank.

You really can’t overstate how important SVB was to the tech sector in Silicon Valley but also across the US. If you were a tech founder they would help you fund your mortgage at your house in Palo Alto. They would be the bank you went to for a loan to buy a vineyard in Napa. They held ski trips and huge events. It was the network hub for investors, for tech founders, for entrepreneurs.

It was getting deposits from its tech crew, who were getting lots of funding from venture capitalists. And they had more cash than they knew what to do with. So they gave it to Silicon Valley Bank, which then had more cash than it knew what to do with.

During the pandemic, about $100bn of excess liquidity flowed into Silicon Valley Bank from its customers that were just raising so much capital.

And what it did is instead of putting it in short-term bonds and notes, it put them in what are known as long-dated bonds, like 10 years. And for them you get a bit more interest in a low-interest environment. But if you sell them in a rising interest rate environment, you realise enormous losses.

When Russia’s full-scale invasion of Ukraine hit, when inflation really bit into the financial system, interest rates had to rise really, really quickly. The zero-interest-rate era was over.

And what this did was as interest rates went up the value of those bonds that the bank held, they went down.

Bonds fell very, very rapidly in price. And all of a sudden, all of those bonds that SVB bought at the top of the market were worth a whole lot less.

Under the regulation they were operating under, as well, they didn’t have to recognise any of the losses they were taking on those bonds, which were dropping in value as rates went up.

What happened with Silicon Valley Bank was that certain rules were relaxed for so-called ‘mid-sized’ American banks. These banks were excluded from certain aspects of stress-testing. And this is when regulators come up with different special scenarios each year to try and see how a bank’s balance sheet, risk-management systems, contingency planning would cope in a hypothetical financial crisis.

Decisions made by the US government only a few years ago stopped them having to provide levels of required liquidity within their portfolios. And again, this is something that allowed the problems within that bank to go undetected for so much longer than had they been happening at, say, for example, JPMorgan or one of the big Wall Street lenders.

I interviewed the Silicon Valley Bank chief executive Greg Becker to ask him if he was concerned about the amount of long-dated securities they held on their balance sheet and the value that they had decreased by. At the time Greg Becker was very calm about the situation.

I do remember reading the story that Tabby wrote about the losses in the held-to-maturity book at Silicon Valley Bank and that they were astronomical. And it didn’t have a lot of impact. In fact, the company put out information around the same time suggesting that their deposit outflows from venture capital were slowing.

By the way, that was the red flag itself, that they now had to disclose deposit outflows from venture capital as a metric that people cared about.

The technology boom was coming to an end. And so companies that had been getting enormous amounts of venture capital and private equity funding were running through their cash and not getting new cash. So they were spending down their balances.

And actually, start-ups started to withdraw some of the money that they did have at the bank in order to fund their operations.

At which point, this really escalated the problems for SVB because as customers withdrew money they had to pay them back. They had to find the money to do so. How are they going to do that? They’re having to sell bonds which were collapsing in value. And this really became a self-perpetuating situation.

On a Wednesday evening in March, Silicon Valley Bank announces that it’s had to sell around $20bn of its available-for-sale securities in order to meet this big drop in deposits and that it suffered a loss of about $2bn in that transaction.

It freaked everybody out. I can remember sitting in the newsroom, and everyone was like, oh, my goodness, they’ve lost all that money. And Silicon Valley Bank in particular had a very concentrated deposit base.

They were also hyperconnected. They were talking to each other. They were sharing information, sharing rumours.

If you’re a venture capitalist, if you’re a founder, all of your WhatsApp groups now all of a sudden are popping up, messages are flying in saying, you know, what are you going to do about this? How are you going to ensure your deposits are safe? Everyone you were talking to was having the same doubts. If you’re going to panic, you want to be the one who panics first.

And so as the share price slid and deposits went out the door, more deposits went out the door. And it started a good old-fashioned bank run.

Except in one respect, which was the run was incredibly fast. Friday morning, we’ve got a live bank. Midnight Friday, dead bank.

Barely 24 hours after it had gone to market and told investors about this $2bn loss, the bank was gone.

When we think of the worst-hit banks in the global financial crisis 15 years ago, the likes of Northern Rock in the UK, the picture we always look back on is of customers queuing round the block, waiting for that branch to let them in so they could literally get their hands on their cash from the teller, take it out, and go to the bank over the road and deposit it there.

You now don’t have to go into a bank branch and take out your money in cash or a cheque. It’s just a few clicks away on your mobile device.

You want to take your money out of the bank because you think it’s in trouble? Boom, boom, boom, press a few buttons on your phone, done.

And so money went flying out the door. You could have a $42bn bank run. And so in the course of basically two or three days they became utterly insolvent.

When Silicon Valley Bank unravelled, I think attention very quickly turned to other banks with similar characteristics – a very concentrated depositor base, an asset-liability mismatch, and high exposure to rates on both sides of those issues.

And there was a second bank in New York called Signature which had some of the same problems – less tech and more crypto. But depositors got nervous because money had already been going out the door. And they just grabbed their money and ran. And so the Federal Deposit Insurance Corporation, the FDIC, had to step in.

Barely three days after Silicon Valley Bank collapsed, the US government said that it would backstop all deposits so effectively no one who had banked at Silicon Valley Bank would lose money as a result of its collapse.

All customers who had deposits in these banks can rest assured… rest assured they’ll be protected and they’ll have access to their money as of today.

Typically, the limit would be $250,000. But actually, when the brown stuff hits the fan the authorities say, never mind that limit. Don’t worry. We’re going to make you all whole. Now, was that the right thing to do?

The idea was that people would continue to freak out and take their money out of banks. But the ones with more than 250 would be less freaked out. And the banks would be able to cover those withdrawals.

We still saw, in the aftermath of Silicon Valley Bank, the collapse and then the sale to JPMorgan of First Republic, another San Francisco bank, even though people knew deposits would be protected and that the US government would step in in a situation like this and make depositors whole.

But in terms of stopping a bad situation from becoming a really catastrophic situation, it worked.

Basically, there’s about two weeks of really dicey behaviour, where share prices are bouncing around and getting very low. And there’s still money coming out of the banks. But it’s not at a level that will destabilise the banks. So things are stabilising. And almost all the banks sort themselves out over the course of the next month or two. There’s one sad exception.

You got to remember banking is largely a confidence game. When one starts to lose the confidence of its customers, this can spread like wildfire.

Once SVB went down people were looking to see which dominoes would fall next, and they looked globally. The most obvious one was Credit Suisse.

It had been something of a dead man walking for quite a long time.

A series of blunders in the end fundamentally undermined the confidence of depositors. And they decided that they’d do better to take their money elsewhere.

This documentary quite literally isn’t long enough for us to discuss all of them here. But some of the more major ones were its participation in Lex Greensill-related supply chain finance funds. Almost 10 billion francs of client money evaporated.

There was Bulgarian cocaine smuggling rings that ended up having alleged links to Credit Suisse.

They had several legacy cases, from being accused of helping rip off the taxpayers of Mozambique in a fake tuna boat fishing scheme. And all of these chickens were coming home to roost.

It got to the point where stupid rumours on the internet were enough to convince certain clients to pull their money out.

One tweet from an Australian journalist which suggested that Credit Suisse could be running into problems was enough to trigger $111bn of outflows from the bank. That skittishness of the bank’s customers, that had never really gone away.

There’s no reason why Silicon Valley Bank’s domino should have hit Credit Suisse’s and knocked it over as well. But it was the market environment that prevailed. People were worried about banking again.

All of a sudden you started seeing, like, really quite scary share price declines in, for example, Deutsche Bank, who appeared to be fine. Regulators, authorities writ large had to act.

Already, discussions were going on among Swiss regulators and Swiss politicians for Credit Suisse to be rescued by its fierce rival, UBS.

The liquidity outflows and market volatility showed that it was no longer possible to restore the necessary confidence and that a swift and stabilising solution was absolutely necessary.

The Swiss authorities sat down UBS and CS and said, this is going to happen, like it or lump it. I mean, oh, to have been a fly on the wall, right? It’s got to be quite a conversation to have.

But basically, you know, they were able to stop these wider reverberations from a crisis pretty quickly, allowing the economy, I wouldn’t say to prosper and thrive, but at least not grind to a halt.

There were casualties in the aftermath of Silicon Valley Bank’s collapse, some more deserved than others. But people don’t need to be braced for a full-on banking crisis.

Whether it’s down to regulators and central banks being clever, whether it’s down to dumb luck, the fact is the system has proven itself to be incredibly resilient in 2023.

We had a big, global, international bank fail. And basically there’s some fallout. And Switzerland has less banks now. But there wasn’t some giant mess that is still spreading its tentacles.

I think we can draw some satisfaction from that because I think the reason it was that way was because of the extra strength that’s been put into the system.

The banks are safer beasts than they used to be. They’re less interconnected. They’ve got much more safety nets. You just… you’re not going to find one bad bank poisoning lots of other bad banks.

Banks can hold as much capital as they want to absorb losses. Banks, they have to determine how risky all the assets they hold on their balance sheets are. And all of these requirements have dramatically increased since 2008.

Having said all of that, you’re not much of a regulator or a supervisor if you look at all that and go, great, we can relax. I mean, you have to stay paranoid to survive in this line of work.

There was this whole raft of new regulations that that came into place after 2008 to make banks safer. But the risk in financial markets and the financial system hasn’t gone away. It’s just been squeezed out into different places.

One of the big unintended consequences of the post-financial crisis reforms was by putting banks under more scrutiny a lot of their activity moved out of the banking sector and into areas which are much less regulated than traditional banks.

Some people call it shadow banking. Some people call it non-banking, but essentially companies that have vast, vast financial firepower now.

Pension funds, hedge funds, insurance companies, all different bits of private markets, stuff where regulators don’t have a huge amount of visibility on what is going on. Are there risks building up there?

The non-bank financial sector is playing a very important role in terms of providing credit to the real economy and has also been the source of a number of shocks of different kinds.

Archegos was a classic example of how the rise of vast family offices, hedge funds – sometimes it’s actually difficult to tell what they actually are – can feed through to the traditional financial system and cause havoc.

Now, Archegos was this huge family office which borrowed billions from the world’s biggest banks and used this leverage to invest in a lot of stocks. These stocks went south very quickly in early 2021. And when that happened, Archegos collapsed and ended up losing the banks, in total, about $10bn.

There were allegations there that the general partner involved was complicit or was hiding information from the banks.

Excuse us, guys. Crossing the lines are rude here, you know?

Hwang and others propped up Archegos as a $36bn house of cards by lying to banks to obtain additional trading capacity and then by using that additional capacity to engage in still more manipulative trading.

Because it’s all private and not very well disclosed, a bunch of different banks lent more money than they expected to one investor. And the thing they thought they had as collateral turned out, A, to have been used as collateral, like, four places, and to be worth a lot less than they thought. And so the combination is pretty terrible.

Credit Suisse was by far the biggest loser in all of this, though the number of banks spread from Japanese lenders to US lenders, European banks.

Even the supposed well-run experts at Morgan Stanley and UBS, they all took big losses by essentially giving this man the ability to make incredibly leveraged bets on very few stocks, hoping to win big but, in the end, blowing himself up and causing a lot of banks to lose big.

Given it was just a hedge fund, the amount of pain it inflicted on the banking sector is actually quite impressive.

This was one rogue person out there. If you had four or five of those at the same time, then I think that could be a big problem.

It was a warning that we don’t have a very good handle on these private funds and investors and institutions that are borrowing privately from lots of different people and whether their tentacles go back into the banking system and could be destabilising.

It’s in nobody’s interest for any kind of shadow bank to get so large and to play around with so much leverage or borrowed money that they end up accidentally breaking a market, whether that is Treasuries or gilts or anything else. And what we gather from our reporting is that regulators are aware that this is a potential problem, and they are likely to act before something really horrible happens.

…will come to order.

2023 obviously was nowhere near on the same kind of global scale that 2008 was. But it was just a reminder that, you know, the bank… the post-crisis regulatory framework was put in place for a good reason.

There was a clear lack of regulatory oversight of Silicon Valley Bank. And a situation like this should never really have occurred. Its collapse led to huge shockwaves not just in Silicon Valley but ultimately across the US and Europe. However, it didn’t lead to the, kind of, full-on global banking crisis that three big banks collapsing in quick succession and others in Europe might have otherwise led to.

If you had said to me at the start of this year, ‘I reckon Credit Suisse is going to disappear and a bunch of banks the size of Soc Gen or Deutsche are going to go under in the US and it’s all going to be fine,’ I’d have said, look, come on, man, that’s just ridiculous. But actually, that’s what’s happened.

The other side is that the Silicon Valley Bank, Signature trigger, we clearly had no idea it was coming. We missed it completely. We were looking at something else. So it is a reminder that risk builds up in places where you’re not sure. But properly handled, we can slow or stop these kinds of freak-outs and prevent them from engulfing the whole financial system.

Does that mean that there is no room to evolve regulation in any way? Of course not. There are always ways, perhaps, of making regulation more efficient. But making it more efficient is one thing. We should not weaken it.

Don’t get me wrong. Markets have got a lot of fish to fry at the moment. There’s a lot of things going wrong. But the fact that we don’t have a full-blown banking crisis that’s consumed the entire financial system is genuinely a reason for everyone to pat themselves on the back. This has gone about as well as it could have done. And I do think it’s slightly miraculous that we’ve got to the end of 2023 without a serious disaster having happened.