Financial markets have been rocked again in recent days. The epicenter of the tremor is once again the global financial system, specifically the banking system. Some media, even specialized ones, mention that investors are afraid of a banking crisis, which is a mistake because there is already a global banking crisis, what they really fear is the consequences.
The bankruptcy of three US banks last week, including number 16 in the system, and the deep crisis of a bank that, as the economist Nouriel Roubini said this Wednesday, is too big to fail, but is also too big to be rescued , we refer to Credit Suisse, are reason enough to assume that there is a crisis, what is not yet known is its depth.
But even as the crisis is unfolding, we can already detect three big lessons from factors such as the failure of Silicon Valley Bank (SVB) and the serious problems of Credit Suisse: they all apply in the world. Even in Mexico, where just today it formally begins the banking conventionthe event of the year for the union, in which they will surely try to “calm the waters” at least in relation to the country’s banking system.
Lesson 1: There is no such thing as zero risk and diversification is essential
Silicon Valley Bank (SVB) received between 2020 and 2021 “tons” of resources deposited by its account holders, many of them entrepreneurs and newly created companies, especially in the technology sector, a bonanza that catapulted the institution several numbers up in the US ranking, since at the time of his bankruptcy his assets were equivalent to 204 billion dollars.
With such a huge supply of money, the SVB decided that there was no safer investment than the US bond market. “What better than treasury bonds from the most powerful country on the planet?” the bank’s main executives must have thought. And so it was, at least initially. Extraordinarily safe investments with a very low risk, close to zero. But being close to zero is not the same as absolute zero. in the first case, things can change overnight, while in the second case, security is total, but it does not exist.
There is no zero risk in the world of finance. Anyone who doubts should review what happened to the SBV: the clients stopped depositing resources first, or they did so in a much smaller amount: Then they began to withdraw that money that they had in their accounts as part of their liquidity. The withdrawals were accelerated and the SVB did not have the necessary liquidity because the resources had been invested in bonds. But, it also happens that interest rates began to rise and, therefore, bond prices fell. Given the need for liquidity, the SVB was forced to sell bonds at a lower price and take lossesthe demand was of such magnitude that the bank was decapitalized, it tried to recapitalize itself with an announcement in this sense, which only triggered panic among customers, who flocked to withdraw their resources.
The SVB invested in highly safe instruments, but market conditions changed and that near-zero risk suddenly multiplied, today the SVB has gone down in history.
Lesson 2: Alert mechanisms do work
The alert mechanisms in the banking systems, at least in the most important ones in the world, among which is Mexico, do serve to, as its name implies, warn about potential risks and eventual bankruptcies of institutions, before they collapse on the market.
Silvergate Bank collapsed, but the market didn’t take it as seriously because, in addition to its size, it was actually known to have a high exposure to the crypto markets, which explained what happened. However, Silicon Valley Bank was the largest and most influential bank in the country’s banking system, we have already mentioned that it ranked 16th among the largest banking institutions.
For this reason, the authorities decided to intervene and declare him bankrupt on Friday, March 10., before its collapse severely impacted the markets. Under the same argument and in an almost unprecedented action, on Sunday, March 12, the intervention and bankruptcy of Signature Bank was decreed, which eased the pressure on the markets.
Early warning regulatory systems are effective, they can undoubtedly be improved, but it is the right path to avoid widespread bank failures due to contagion between institutions. At the same time, early warning regulatory systems reduce systemic risk, in this case, the risk of the banking system.
Lesson 3: Governments (and institutions) must be proactive
Last Monday, one day after the Signature Bank bankruptcy, the president of the United States, Joe Biden, addressed the citizens, markets and investors of his country, and automatically of the entire world, to try to instill confidence and certainty. It could be said that he did not get much, judging by the volatility of these days in the stock markets; However, even if he did not exist, surely today history would be different if one of the most powerful men on the planet had not done what he did. But it was not only the presidential action, let us remember that the intervention and bankruptcy of the Signature Bank occurred on a Sunday, when everyone in this part of the hemisphere is at rest; Both the Fed, the Treasury Department and the Federal Deposit Insurance Corporation (FDIC) sent the message that they were following the system very closely and that their hands did not shake to take action, even on a Sunday. Furthermore, this Wednesday the shares of the troubled Credit Suisse, a Swiss and much more global bank, sank 28 percent in European operations and on Wall Street they fell another 30 percent. The bleeding would have led to a more dramatic moment had it not been for the announcement that the Swiss government was willing to provide liquidity to the institution if required; that is, he was not going to allow its bankruptcy, at least not its sudden collapse. These signals are important, they do not prevent volatility, but they do reduce uncertainty and reduce the risks of financial collapses that are never positive, but in the current economic context they can even be lethal.
As we pointed out, there is already a banking crisis, but we do not know its consequences or how deep it will be. The situation of many banks around the world is unknown until now.
These three lessons teach us that, although this type of crisis cannot be avoided, its effects can be reduced. Today we are talking about market volatility and bank share price losses, but we could tell a much worse story.
We will see how deep the crisis is, but if we understand that zero risk does not exist and that, therefore, any minimal risk can multiply and even lead to bankruptcy. In addition to understanding that the current regulatory mechanisms are perfectible but correct, and that governments and institutions must participate to avoid systemic bankruptcy, surely a step forward will have been taken to overcome this crisis.
By the way, in this last factor, that of the participation of governments to avoid systemic bankruptcy, Mexico was a pioneer and today the fruits of that decision to face bank bankruptcy by means of bailouts with public resources continue to be reaped, if they had not done so today the country would be very different. Yes, it had a high cost that we have paid for many generations, but the bankruptcy of the country would be worse. For this reason, the United States government immediately took action on the matter, it is not a minor issue.
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