Banking crisis “Credit Suisse has long been a case for the intensive care unit – economy
The big Swiss bank CreditSuisse reeling, there is a bank failure in the USA – the banking system is in crisis again. Banking expert Martin Hellwig, 73, former director at the Max Planck Institute in Bonn and ex-head of the Monopolies Commission, warned of this ten years ago in his book “Des Bankers Neue Kleiner”. He and co-author Anat Admati from Stanford University were about to submit a revised version of the book, including new analyzes of Credit Suisse. Due to current events, the delivery has been postponed a little.
SZ: Mr. Hellwig, as early as 2013 you warned that the reforms to banking regulation after the financial crisis would not be enough. Now Credit Suisse needs to be rescued, before that the American Silicon Valley Bank went bankrupt. There’s a hint of “Lehman two” in the air. Do you feel satisfaction or anger?
Martin Hellwig: Neither, just worry. Unlike Anat Admati, I never expected politicians to react to our proposals. They thought we were crazy intellectuals who never have to face the voters.
Should the Swiss financial regulator have intervened earlier at Credit Suisse (CS)?
I know too little about the inner workings of the bank to be able to judge. I’m just wondering: what did supervisors do between 2013 and 2019? Did she just let the bank do it? To what extent did you prompt Credit Suisse to clean up internally? Were there enough provisions? After the losses of four billion at the Archegos fund, the supervisory authority should have asked: You were the last ones still in Archegos, are you sure that this type of complex business is the right field for you?
Now it probably boils down to the fact that the UBS Credit Suisse has to take over. What do you make of it?
The problem is multifaceted. On the one hand, a takeover by UBS ensures a certain level of professionalism in processing in the very short term. At the same time, however, it puts a strain on UBS’s business operations, because it has to assign people to bring CS under control. In addition, it is not clear which losses and which risks are still on the books at CS. UBS can hardly take these risks. From their point of view, the viability of a takeover depends on what losses and risks the state takes on. It is not clear what this means for the Swiss tax authorities. In addition, the merged bank still has total assets of around CHF 1,800 billion. UBS used to be that big on its own, but even then it was said that it was too big for Switzerland, especially since both are bigbanks were heavily indebted in foreign currencies, dollars, euros and pounds, which the Swiss National Bank cannot print.
In the US, the Silicon Valley Bank (SVB) has gone bankrupt. Why?
Central banks have been raising interest rates massively since early 2022, which has significantly reduced the value of government bonds or fixed-rate mortgages held by Silicon Valley Bank. Therefore, the bank was de facto insolvent since September 2022. This was not reported, because it is not necessary for receivables that the bank wants to hold to maturity. If the depositors remain silent, that’s fine too, but if they want to withdraw their funds, the bank has to sell the securities and realize the losses.
Has anything like this ever happened?
We know this from the American savings bank crisis in the early 1980s. At that time, two-thirds of the savings institutions were insolvent, and that was not shown either. The zombies were then allowed to gamble for ten years, and cleaning up was correspondingly more expensive. The run of uninsured depositors at SVB prevented that from happening. However, supervision was just as passive now as it had been then. Remarkably, the risk of interest rate increases hardly plays a role for bank regulation and supervision. That’s why SVB was able to take these risks. Politicians and regulators have learned nothing from the experience of the 1980s.
Is there now a threat of a domino effect à la Lehman 2008?
Not immediately, because the bank’s lenders are secured. There is, however, information contagion: the bankruptcy of SVB caught the attention of depositors in First Republic, since the situation of both banks was similar. If I see a bank similar to my bank fail, I prefer to withdraw my deposits from my bank. The timing of the withdrawals at Credit Suisse may also have something to do with this type of contagion, though: Credit Suisse has long been an ICU case, and there was several bad news stories last week.
Stricter rules apply in the financial sector – keyword Basel 3 capital rules. Does this now help us to prevent a looming spread of this financial crisis?
No, the banks’ own funds required under Basel 3 are too small, so that in the event of major losses there is a risk of imbalance or even insolvency, as is the case with Silicon Valley Bank. And there are still no practicable ways to clean up complex banks like Credit Suisse without using state money or drastically damaging the system as a whole.
Why don’t politicians dare to regulate the banks more strictly?
First of all, politicians find banks beautiful as a source of money. This is one reason why the Landesbanken are not being closed and have hardly been consolidated. They should actually be referred to as extra-parliamentary prime ministers’ financing institutes.
It is politically sensitive to let banks go bust, even if they are actually insolvent. In bankruptcy, the shareholders lose their investment and the creditors have to bear part of the losses. This does not go down well with those affected. When Italy sent two banks into bankruptcy in 2017, not only shareholders but also subordinated creditors lost their money. This sparked outrage and cost the Italian government the 2018 election. The protest parties Lega and Cinque Stelle – and the media – denounced the government’s dealings with creditors, including the government’s flinching before the European Commission, which had forbidden a bailout by the state.
What is the solution? They demand significantly more equity for banks.
The banks have to be strengthened in such a way that insolvency can hardly occur. The notion that banks can be resolved without causing much outcry or damage is an illusion. That’s why we demand that the institutes finance 20 to 30 percent of their activities with equity. The expression “20 to 30” is to be understood in such a way that banks within this corridor are not allowed to pay out any bonuses or dividends and are not allowed to buy back shares. Banks that are below 20 percent must be recapitalized. If that is not possible, the authorities should intervene while the bank is still clearly solvent.
Bankers warn that with such equity capital rules, they can no longer adequately finance the economy.
In plain language: The bankers would like to expand without using their own funds for it. Additional equity dilutes the position of existing owners, who would like to own the profits from the expansion; the risks are borne by creditors or taxpayers. At SVB, customer deposits have grown from $60 billion in late 2019 to nearly $200 billion in early 2022. The funds were used to buy securities, since not so many loans were in demand. At 1.65 percent on bonds and 0.04 percent on deposits, you still make a nice profit – until interest rates in the market rise and the bonds lose ten to twenty percent in value, depending on the term.
Would the implementation of their proposals have prevented the US bankruptcy?
If Silicon Valley Bank had had 20 percent equity, it would still be solvent today. And if there hadn’t been a bank run. With this equity ratio, it would not have been possible for the bank to grow so quickly, because it would have had to raise fresh capital in the meantime. Higher capital buffers help prevent certain dangerous business strategies in the first place. The institute no longer quickly reaches the point where its existence is in jeopardy; it has enough time to reorganize the business if problems arise.
Politicians don’t want that, why?
There is a fatal symbiosis of politics and economic interests. The self-importance with which Mr. Ackermann from Deutsche Bank warned of higher capital requirements in an interview with your newspaper in November 2009 still takes my breath away. Higher capital requirements came at the expense of lending and economic growth – this, mind you, just a year after the lack of capital in many banks was responsible for the drama of the financial crisis, with the biggest collapse in lending and economic growth since the 1930s.
Something like that has a good tradition in the history of the Federal Republic, as has also been shown by the lobbying for gas supplies from Russia.
It may be, but that doesn’t make it any better. Incidentally, the population is more aware of this today. The bank bailouts in the 2008 financial crisis destroyed a great deal of trust. The fact that the many reports about the participation of German banks in scandals had no recognizable consequences for those responsible is also part of it. Likewise the diesel scandal of the German automobile companies. The population perceives the misconduct and also perceives that the supervisory authority does not intervene and that the federal government covers the companies, for example during negotiations in Brussels. The discussions of the past year on the subject of BASF and natural gas also belong in this context.
The banks say: trust us, we have changed, we no longer gamble.
Then why is there such fierce opposition to anything that might restrict gambling? In the US, the Volcker Rule was intended to restrict banks’ proprietary trading with deposit funding, but that has now been practically abolished. The dominance of investment bankers at Deutsche Bank, which lasted until recently, should also be addressed here. The development of the trading business since the 1980s has permanently changed the culture of the institutes. A lot of money was made during these decades. Then there were also practices aimed at cheating partners with complex derivatives, with newly created shares, with securitisations. A culture that prioritizes profit above all else is dangerous.
Do you think that politicians will react at some point?
I think the perception that the financial sector is bubbling up again hasn’t quite arrived. Politics currently has other problems, the war, climate change, the pandemic. However, we will have considerable arguments in the central banks as to how they should deal with the obvious conflict of objectives between price stability and financial stability.