The timing couldn’t have been better for the theater group De Verleiders. Their new play went on Thursday Generally speaking, ten years later premiered in the Nieuwe de La Mar. Precisely at a time when the fear of a new credit crisis grips the markets.
Things may have changed since the last credit crisis. But nothing has been done with the indictment of De Verleiders, including Pierre Bokma, Victor Löw and George van Houts. Banks can still create plenty of money and still lend many times the money entrusted to them by savers, account holders and bondholders. If they all want their money back, the bank is hopelessly lost.
How vulnerable the banking sector still is has become apparent in the past ten days. In the US, Silicon Valley Bank, the fifteenth largest bank in the country, collapsed. That seemed like a local occurrence, because outside of California, no one knew about this bank. But everything changed when the Swiss bank Credit Suisse also ran into problems. The ‘scandal bank’ was unable to produce an annual report. And the Saudi major shareholder did not give way, forcing the Swiss state to intervene with a rescue plan of 50 billion francs.
Far from my bed
There is no real panic among savers yet. But even during the credit crisis, it took some time for everyone to realize the seriousness of the situation. In the spring of 2007, parts of the major American investment banks already collapsed, but that still seemed a distant event. In September of that same year, a year before the Lehman moment that escalated the crisis, the first major bank run occurred. Not at an American bank, but at Northern Rock in the UK, where long queues of anxious depositors formed in front of the office.
In April 2008, the investment bank Bear Stearns was rescued. Each time there were signs that the worst of the suffering was over, but each time there were new disasters that caused confidence to sink further and other banks to run into problems. So this time too, it can take a year and a half before people with savings have sleepless nights again.
Crises are never the same. The cause of the current ‘crisis’ differs from that of fifteen years ago. Then it just started with a series of interest rate cuts by then Fed president Alan Greenspan, which led to an overheating of the housing market. People who did not have sufficient income were tempted to buy houses with the idea that prices could only rise. And when things went wrong, it turned out that these toxic mortgages repackaged as bonds had already spread all over the world.
Now the crisis seems to be the result of a series of interest rate hikes. As a result, the prices of the bonds they hold on their balance sheets have collapsed, affecting banks’ solvency. If confidence then disappears, the turnips are ready.
Harald Benink, Professor of Banking and Finance in Tilburg, says that too little has been done since the previous crisis. ‘The capital buffers have been strengthened by the Basel III agreement. Shareholders’ equity now accounts for 5.5 percent of the balance sheet total. In 2007 and 2008 that was 2 to 3 percent. But it remains historically low. Before World War II it was 15 percent. We argued in favor of gradually increasing the buffers to 7, 8 and 9 percent, but the banks did not want that. The higher the buffers, the less regulation is needed and the more stable the banks are.’
Jerome Schneider, portfolio manager at the world’s largest bond investor Pimco, says the new problems facing US banks highlight the risk of fractional reserve banking, the fact that banks hold only a fraction of deposits as reserves.
Recent events do remind Schneider of 2008. The global financial system has undoubtedly become more resilient, thanks to new central bank facilities and regulations such as mandatory capital requirements. ‘But when depositors demand their money back en masse, problems arise. That is the inherent risk of our banking system.”
During the crisis of 2008, the deposit guarantee scheme was also adjusted by Finance Minister Wouter Bos. The state guaranteed 100,000 euros in savings instead of 20,000. But even that is not enough. “Many of Silicon Valley Bank’s corporate clients had current account balances of $25 to $40 million. They will remove that if the bank’s solvency is threatened,’ says Benink.
In addition, in the years after the crisis, the so-called bizarre bank bonuses of tens of millions per year were limited. But the banks seem to have long since forgotten this. London-based Standard Chartered Bank’s bonus pool rose 26 percent this month to $1.6 billion, the highest amount since the previous crisis. Last week it was announced that ex-ING CEO Ralph Hamers received 13 million dollars last year from his current employer UBS, one of Credit Suisse’s biggest competitors.
The good news, according to Jerome Schneider, is that despite the volatility, markets appear to be functioning well. Still, these events may make banks less inclined to lend money at a time when credit growth was already slowing down. “That could bring forward a possible recession in terms of timing.”
The Seducers have enough ammunition for another series of plays.