One bank collapses how many more will follow? Image courtesy of Shutterstock

Silicon Valley Bank (SVB) was probably not a name on the tip of Critical Mass readers’ tongues, at least not until last Thursday when unexpectedly it went bust. Comparisons to the Lehman Brothers’ collapse in 2008 were obvious, but there are significant differences. Nonetheless, we all know that when banks start going bust that is not a good sign for the welfare of global capitalism. And we should not forget that it was the collapse of the banking system in 2008 that was the pretext for 10 years of austerity measures.

Founded in 1983, SVB has been a popular choice for investors and entrepreneurs in the technology sector. According to some sources, by 2015 it served 65 % of all US start-ups, mainly in the tech sector. Until recently SVB looked to be doing really well. Following the pandemic, investors were keen to get things back to normal and SVB found itself with $130 billion in new deposits in 2020 and 2021. Unable to loan out that amount of money, the bank invested in government bonds. Their entire business model was predicated upon low interest rates.

As we all know, in order to control inflation, central banks have been raising interest rates. This placed SVB in a difficult position because their deposit costs rose from 0.14 % to 2.33 % in under a year. They had a plan to buy their way out of this problem, but their investors had other ideas and started to withdraw their funds. Depositors withdrew $42 billion in 24 hours — forcing the Federal Deposit Insurance Corporation to step in. The FDIC is an independent government agency that insures bank deposits. Within hours other depositors started a run on the bank.

Economist Michael Roberts explains the process in simple to understand terms:

“The immediate development was the announcement by SVB that it had sold at a loss a bunch of securities it had invested in and that it would have to sell $2.25 billion in new shares to try and shore up its balance sheet. That triggered a panic among key tech firms in California which held their cash at SVB.  There was a classic run on the bank.  With lightning speed, the bank had to stop depositors withdrawing cash. The company’s stock price collapsed, dragging other banks down with it. Trading in SVB shares was halted, and then SVB abandoned efforts to raise capital or find a buyer, leading to the FDIC taking over control.”

Financial experts, including those at the Financial Times, are presenting this as a one-off. But over the weekend First Republic Bank, which has more than 80 branches across the US, found itself facing a run on its funds as tech companies panicked and feared losing their money. First Republic Bank’s shares fell 15% on Friday. They slumped 65% in pre-market trade on Monday. The bank’s stock is down 33% so far this year.

Meanwhile HSBC was able to purchase SVB (UK) for £1. In a statement, Chancellor Jeremy Hunt said: “The UK’s tech sector is genuinely world-leading and of huge importance to the British economy, supporting hundreds of thousands of jobs.” However, whilst the HSBC deal is looking after deposits, there is no guarantee that this will not start a real decline in lending to tech startups, very few of whom make money in their first few years.

In 2008 when the first banks started to crash, we were assured that these were one-off events. They weren’t then, and there is no guarantee that they will be now. As Michael Roberts concludes:

“SVB’s collapse is due to a wider event, namely the Federal Reserve’s aggressive interest-rate hikes over the past year.  When interest rates were near zero, banks like SVB loaded up on long-dated, seemingly low-risk treasuries. But as the Fed raised interest rates to ‘fight inflation’, the value of those assets fell, leaving many banks sitting on unrealised losses.”

The failure to control inflation and the lack of effective regulation on banks always trying to squeeze the last bit of profit out of every dollar or pound invested makes the global markets risky from an investment perspective. Why should socialists care if banks are going bust? In some ways we don’t. What we do care about is the knock-on effect, because there is simply no way national governments will allow banks to go to the wall. In protecting them, the money must come from somewhere and, as if workers and those on benefits have not suffered enough, they will, once again, have to pay for the banks’ profligacy.

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