Eamon Quinn: Bank collapses and corporate failures - haven’t we seen this all before?

Any ambitions to reform Ireland’s dysfunctional banking market have gone out the door in the wake of the recent global banking crisis, as Irish households and businesses continue to pay some hefty margins on their loans, writes Business Editor Eamon Quinn

Silicon Valley Bank, a lender to once-booming tech startups, got itself into trouble over a bunch of long-dated government bonds on its balance sheet, just as global interest rates shot higher. Picture: Philip Pacheco/Bloomberg

The collapse of a US bank that no one in Ireland had heard of alerted the world that all was not well with global banking. By this weekend, it was abundantly clear that the turmoil was getting worse and not better.

Silicon Valley Bank, a lender to once-booming tech startups, got itself into trouble over a bunch of long-dated government bonds on its balance sheet, just as global interest rates shot higher.

This simple but baffling banking miscalculation helped set off a run on its deposits as word got out that customers could lose all their money.

With deposits worth €164bn — equivalent to a sizeable chunk of the annual output of the Irish domestic economy — the crisis enveloping the Californian lender just two weeks ago turned out to be no small beer.

The spectacular collapse exposed other US lenders that had links to other parts of the tech world: lender Silvergate and Signature Bank had also gone under. More worryingly, First Republic, a large regional lender based in San Francisco nursing similar problems, is still seeking care at the emergency department.

It didn’t stop there. The turmoil jumped across the Atlantic to Zurich, the capital of European banking, after customers of Credit Suisse scrambled to withdraw billions in Swiss franc deposits for fear of losing it all.

By last Sunday night, regulators had forced a €3bn shotgun takeover on Credit Suisse by fellow Swiss banking giant UBS.

The shockwaves continued into this week, as the Federal Reserve in the US, the European Central Bank, the Swiss banking authorities, and the Bank of England pledged to get back in front of the crisis.

The logos of the Swiss banks Credit Suisse and UBS in Zurich, Switzerland. After the turmoil jumped across the Atlantic to Zurich, regulators forced a €3bn shotgun takeover on Credit Suisse by fellow Swiss banking giant UBS. Picture: Michael Buholzer/Keystone via AP

US president Joe Biden was joined by a chorus of bank officials, as well as finance ministers from Dublin to Athens, to insist that their national banking system was safe like no other, promising the turmoil would pass soon.

Worringly, by this weekend, stock market investors — who act as the canary for signs of corporate failures — signalled they were not satisfied that enough had been done.

Shares in European giant Deutsche Bank (it’s hard to downplay its importance) slumped as the cost of insuring its bonds against a default soared.

First Republic shares were wobbling and battered by the end of this week, in a further sign that the crisis is far from being resolved.

Almost every bank in the world has come under scrutiny in the last 14 days by investors for fear of what regulators might already know about the next weak link in the global banking chain. The disease had been diagnosed as rapidly rising interest rates catching out banks stuffed with too many long-dated government bonds.

Analysts rushed to detect other potential hidden horrors on bank balance sheets that the authorities might not wish to become immediately known.

Regulators had used the same tactics at the onset of the great financial crash over a decade ago.

The lesson of 2007 was that bank failures, regardless of where they occur, matter a great deal to everyone no matter where they live in the world. As detailed by the Irish Examiner in recent weeks, many independent experts working at a distance from banks, their regulators, or national governments, have been spooked by the spectacular turn of events. The events at Deutsche won’t have calmed their nerves.

Some parallels with 2007 are indeed startling. Regulators have used the same language, blaming bad apples in the global banking barrel to excuse their failings.

For every “badly and recklessly run” Silicon Valley Bank, with its heavily concentrated lending, read across for the singular “rogue lender” as Anglo Irish was once termed back in the day, all the better at the time to insulate it from other supposedly financially healthy banks.

Veterans of the banking collapse in Ireland have also been taken aback by the way the potentially flawed distinctions have been made between liquidity and solvency for some to explain away current banking woes.

And completing the picture, Jean-Claude Trichet, the former head of the European Central Bank, was back on financial network CNBC to say reassuring things about the regulation of eurozone banks.

This is not to suggest that reassurances about Irish, Greek, Portuguese, Spanish, Italian, or whatever nation’s banks are not true. So, what to make of what has just happened, from an Irish perspective?

The second week of crisis closed with the Federal Reserve, Swiss National Bank, and the Bank of England getting their swagger back, apparently sufficiently assured about global banking to push ahead with a further round of interest rate increases, the very measures that are said to have prompted the banking turmoil in the first place.

At the start of this week, there was a possibility that the crisis would upend their campaign of global of rate hikes, with the threat of more banking failures outweighing the risk of runaway inflation.

By this weekend, some central bankers were again hardening their talk about future rate increases. That points to bad news for the many Irish households, whose fixed-rate mortgages have yet to take account of the hefty rises in rates since last summer, with more rate hikes likely to come.

Silicon Valley Bank headquarters in Santa Clara, California. Picture: David Paul Morris/Bloomberg

In Ireland, bank shares of the dominant lenders, AIB and Bank of Ireland, had fallen sharply along with European peers, and then rebounded, but only to fall again yesterday.

Many experts believe that their remarkable share price gains reflect that the global banking turmoil will kill off potential Irish rivals that wholly rely on increasingly costly market funding.

AIB and Bank of Ireland have further bulked up with the exit of formidable rivals Ulster Bank and KBC Bank, and loosening their duopoly over Irish banking looks even less likely.

That will come at the expense of Irish households and businesses, experts have warned, as Irish banks become more profitable, paying little for customer deposits while charging hefty margins on their home mortgage and small business loans.

The crisis will likely further weaken whatever is left of the backbones of the Central Bank and the Government. Any lingering ambitions to reform Ireland’s dysfunctional banking market has gone out the door, along with the crisis of the last 14 days, critics have said.

Anthony Foley, associate professor emeritus at DCU Business School, said he starts from the premise that it is altogether possible for banking disasters to unfold like they did in 2007.

Outsized bad debts

He notes that the outsized bad debts of Irish banks of over a decade ago emerged into the epicentre of a global banking crisis. That led to the Government being cut off from sovereign debt markets and to the subsequent bailout and austerity.

“We were told in 2007 that nothing disastrous could happen and then it did happen,” said Prof Foley.

“We were told that AIB and Bank of Ireland were only liquidity problems, and not a solvency problem. We were told that in Europe and US that bank failures could never happen again because of all the regulations.

“But it did happen again.”

The symptoms of the malaise and the nature of troubled funding on the balance sheets of global banks may be different this time, but there are some comparisons too, he said.

Silicon Valley Bank held a bundle of long-term US government bonds and the value of that bond debt fell, as it does when official interest rates go up.

Regulators should be quizzed on whether they had fully anticipated that hiking rates aggressively would spark problems for banks holding a lot of bond paper, while the toppling of Credit Suisse has raised a host of other questions on this side of the Atlantic, Prof Foley said.

“I would be very nervous,” he said of global banking. “Now we have Credit Suisse.”

The toppling of Credit Suisse has raised 'a host of other questions on this side of the Atlantic'. Picture: Ennio Leanza/Keystone via AP

After much lobbying, the return of bank bonuses again failed in their stated purpose of attracting the most able candidates, bankers who should have anticipated the nature of the financial time bombs on their own banks’ balance sheets, as global interest rates rocketed.

Prof Foley said one consequence of the Silicon Valley Bank fiasco may be a return to some form of “good old-fashioned” banking where global or big US regional banks leave lending to high-risk tech startups to venture capitalists who are supposed to be equipped to take on such risks without literally bringing down the bank.

“The bottom line is that it is naive to expect that all the nasties in US and Swiss banks could not happen elsewhere,” he warned.

Prof Foley said the Federal Reserve and ECB were rightly taking the fight to inflation with rate hikes, but it was reasonable to expect them to have fully assessed whether “the solution causes other problems”.

The slowdown in global technology and the shakeout of global tech jobs from San Francisco to Dublin was signalling that central banks were getting what they want from interest rate rises, without causing widespread recessions.

He said his worst fears were that inflation would become embedded and interest rates would stay higher for longer, but he nonetheless believes that inflation will not get out of control.

Economist Austin Hughes isn’t so sure that the European Central Bank has properly diagnosed the problem, saying the European Central Bank is “warning like banshees that something horrible was to happen”, but was still ill-equipped to fight inflation because incremental interest rate hikes were not suitable for the battle.

Mr Hughes argues that excess demand is evident in the US, but not automatically the case in Europe where the European Central Bank is using the same aggressive tactics.

“It is an unfortunate coincidence of events where you have the pandemic, the war, and the supply disruptions all sort of spewing together,” he said.

“But to my mind, they are discrete events that will run their course without leading to a sustained rise in prices.”

That means that the European Central Bank “should decouple” from the Federal Reserve because there are not the same demand problems in Europe as there are in the US, he said.

As for the woes of global banks after two weeks of turmoil, Mr Hughes warned that it’s all but impossible to tell from the outside what other problems may be lurking out there on banking balance sheets. Friday’s jitters over Deutsche Bank has confirmed those views.