The collapse of the tech-focused Silicon Valley Bank (SVB) in the US and the rescue of 167-year old banking institution Credit Suisse may feel far from home but they should concern us. It could be a canary in the coalmine and warning of what is to come.
These events have left markets jittery: the FTSE 100 is down by 10 per cent in the last month, with over £150 billion wiped from UK share values in just the last week. The biggest falls have been in bank shares. Logically if one bank fails, and it’s purely one bad apple, then the other banks should benefit – they can now grab a larger market share. But the fact that shares are falling across the banking sector suggests there are fears problems may be more widespread.
In the wake of SVB’s collapse, the UK Chancellor Jeremy Hunt trumpeted that the UK arm of SVB had been transferred to HSBC without a penny being spent in taxpayer support. Regulators and politicians in the US and UK assured us this was an isolated incident – just one bad bank – and that there was no risk to the wider global banking system, no risk of contagion.
However, the rescue of one of Europe’s biggest and oldest banks, Credit Suisse, just a week later has led many to question the confidence of that assertion.
All the ingredients are there for another banking crisis: governments delusional about the risks of a deregulated finance sector, incompetent finance chiefs, obscene bonuses being paid to bankers, panic in the markets, and auditors and credit rating agencies unreformed from the last crash.
The banking crash of 2007/08 has scarred the UK economy ever since. Wages today in the UK are in real terms lower than they were in 2008. Solid and sustainable growth never returned.
That scarring was not inevitable. Policy failure after policy failure has compounded the problem: from George Osborne’s austerity to Brexit. The Covid pandemic and Ukraine war have not helped, but the ultimately the greatest failure has been not changing our economic model in the wake of the global banking crash.
Just before the global financial crash, newly-installed Prime Minister Gordon Brown, who as Chancellor had championed light-touch regulation, gave a speech to the City of London heralding the assembled financiers, saying this was “an era that history will record as the beginning of a new golden age for the City of London.”
Within a year, Brown was putting together an unprecedented package of bailouts, nationalisations and debt-write offs to stop the entire system from collapse.
Brown’s hubris is an unheeded warning. The UK economy had the largest finance sector of any major economy, and was therefore the most exposed. We also had deregulated the sector to the point where most regulators and politicians had little clue about how the banks were operating. That continues to be the case, and politicians continue to tie themselves to what Liz Truss called the “jewel in the crown” of the British economy.
Late last year the Government published the Financial Services and Markets Bill, the purpose of which, according to Government ministers, was to “enable the UK to assert its leadership, and to drive forward change to capture a greater share of the global market for financial services”. It is on course to become law this summer – ripping up many of the meagre protections put in place in the wake of the last banking crash.
The Bill proposes to remove the cap on bankers’ bonuses, the EU-wide solvency insurance rules and the MiFID II rules – which were about stabilising the finance sector, increasing transparency and removing incentives for risky, speculative behaviour.
Labour worryingly has concurred: “enabling the City to thrive will be fundamental to the delivery of the tax receipts we need to fund public services and support people through the cost of living crisis”. Deregulating the city led to the crash and recession. The solution to the failings of the finance sector were massive bailouts. The public services got a decade of austerity.
The problem is not just with politicians though. There is a clear disregard for the public among the banking sector.
Last year, for instance, the Bank of England Governor Andrew Bailey told British workers not to demand better pay deals, while jacking up domestic interest rates against global inflationary pressures. UK households are currently facing the largest decline in disposable incomes for 70 years – in large part due to falling real wages and rising housing costs.
Moreover, auditors failed to highlight concerns when it came to SVB. KPMG gave SVB’s accounts a clean bill of health in February – mere weeks before the bank collapsed – just as PWC had signed off Northern Rock’s accounts in 2007.
It was during this time, almost 15 years ago, I found myself in front of TV studio cameras for the first time. I co-ordinated a heterodox network of left-wing economists and activists called LEAP economics, and was being interviewed about Northern Rock.
It is in these moments that the curtain is pulled back and the system is exposed. Such moments are an opportunity for change. Back then I characterised the nationalisation of Northern Rock as a “business-as-usual bailout” which had “privatised public money”.
We had the chance in 2008 to reform banking and we threw it away. The entire UK banking sector was being propped up by government guarantees and loans. The Government even took a significant stake in some of the biggest banks. But none of this leverage was used to force reform.
The central lesson is that if it’s too important to fail, it’s too important to be left to the market. Banking – an essential service for people and businesses alike – should have been nationalised to serve people and businesses . Instead we have a finance sector that serves itself – creating huge bonuses and shareholder dividends during the good times, while expecting public support in the bad.
The last couple of years have been good for banks – with bumper profits – the hike in interest rates has seen UK banks increase their margins, by increasing rates on mortgages and loans, but not so much or so quickly on savings. If banks had stayed in public ownership and be run for public good, those profits could have been used to support lower interest rates or provide higher interest rates for savers.
If the Government is serious about learning from the past, then in the short-term it would pause the Financial Services and Markets Bill currently going through Parliament until the dust settles; it would act to make auditors liable when they sign off on accounts for strategically important businesses like banks; and it would make it clear that if any public assistance is needed it will mean public ownership and control.
Whenever there is a financial crisis, there is only one pertinent question: who pays? And perhaps equally as important: who is protected?
If we are lucky, and the troubles of SVB and Credit Suisse are mere coincidences, then this is still no time for complacency. The fact that these institutions fell exposes the light-touch regulation that could damage the economy again.
This feels reminiscent of 15 years ago – and, like then, I have no confidence that our politicians, finance chiefs, regulators and auditors have any clue what they’re doing, nor that they will act in our interests.
Andrew Fisher is the former director of policy at the Labour Party