Bad banker (4)

The banking world is in a tizzy, swept by a turmoil marked by massive mismanagement every step of the way, massive flight of deposits (called a bank run) and massive loss of confidence, amid rising inflation (the highest in 42 years) and rising interest rates (the highest in 14 years).

Many banks, including the biggest ones, had been mismanaged for years.  We did not notice that. Then inflation started galloping, fueled in part by the invasion by oil- and gas-rich Russia of Ukraine, the world’s major producer of wheat and other food items. The result has been a steep rise in prices of goods, energy and of nearly everything.

To contain inflation, central banks around the world, as if on cue, began raising interest rates. From near zero in the United States, the Fed raised its rate by nearly five percentage points.

Our own Bangko Sentral ng Pilipinas has tripled interest rates in just a year, to 6 percent and is not done yet.

Central bankers are an omnipotent lot. You cannot sue them for wreaking havoc on your life and on your business. If you sue them, even long after their retirement, the taxpayer spends for the cost of litigation. It’s like wasting your hard-earned money on a losing battle.

Interest rates are the price for the use of money. You raise them, you raise the cost of money. You raise the cost of money, you raise the cost of capital. You raise the cost of capital, you raise your operating cost. You raise operating cost, you raise prices. You raise prices, and demand is dampened. You dampen demand, consumer prices begin coming down. You control inflation. That’s the theory.

The theory has not worked. Prices keep rising. In the Philippines and abroad. Inflation is now the No. 1 worry of Filipinos. If inflation goes up by 8 percent, Filipinos must spend an extra P1.28 trillion for the same volume and for the same quality of services they bought last year.

The P1.28 trillion is even conservative. According to Albay Rep. Joey Salceda, an 8 percent inflation costs Filipinos about P4 trillion a year. That is the equivalent of 75 centavos of every peso of the national budget going to waste every year.

If government were to absorb P4 trillion worth of inflation, three-fourths of its services would have to disappear. It could be good news if three-fourths of Congress were to disappear. But congressmen cannot disappear. They will just legislate their existence back.  Right now, they are trying to add powers to exercise. That explains the Cha-cha vote.

Because of rising interest rates, banks have incurred monumental losses. It’s called duration risk.

The banks invested much of their depositors’ money in so-called safe IOUs like government securities, which have long-term (ten years) maturity, using money that can be withdrawn anytime.

Interest rates went up so depositors are asking for higher interest yield on their deposits. The banks cannot do that because a bank that earns only 2.2 percent on 10-year government IOUs is obviously losing money as interest rates have gone up to 4.5-6 percent.

Four US banks have failed – Silicon Valley Bank of California (16th largest), Signature Bank of New York (29th largest), Silvergate Bank and the First Republic Bank of San Francisco (14th largest).

Catering mostly to venture capitalists and some 1,500 startups, SVB has declared bankruptcy. More than 90 percent of its deposits were uninsured but US President Biden has said no depositors would lose their deposits.

New York’s Department of Financial Services has taken over Signature Bank, which had $110 billion in assets and $88 billion in deposits.

Mainly a crypto bank, Silvergate Capital was liquidated on March 8, 2023. It had $11 billion in assets. In January, it laid off 40 percent of its people and reported a nearly $1-billion loss in the fourth quarter. The day before its closure, it lost 38 percent of its value. Deposits went down 68 percent to $3.8 billion.

On Thursday, March 16, First Republic Bank was rescued by America’s 11 biggest banks, with a deposit infusion of $30 billion. The bailout was one of the most sweeping in US banking history, after the failures of SVB, Signature and Silvergate, even as Treasury Secretary Janet Yellen told Americans their “banking system is sound.”

In 2009, the US erected strict regulations to stop bank failures. Instead, more than 500 US banks have failed since.

On Sunday, March 19, UBS, Switzerland’s biggest bank, bought its main rival, the failed Credit Suisse, for a paltry $3.2 billion (less than half CS’s value two days earlier), in a shotgun wedding organized by the Swiss government, through the Swiss National Bank which promised to provide $108 billion in liquidity loans.

Previously, on March 15, the Swiss central bank had pumped $54 billion into CS but this did not stop the loss of confidence by depositors and clients. Fifteen years ago, UBS itself failed but was also saved by the government.

Said The New York Times: “Created in 1856 to finance Switzerland’s rail network, Credit Suisse ascended to the top echelons of finance, at times standing toe to toe with American titans like JPMorgan Chase.”

“But the bank, which is based in Zurich, was also tarred by decades of scandals, management upheavals and failed attempts at reform that damaged its reputation, attracted lawsuits and left it reeling from losses. The recent rout in banking stocks, spurred by the collapse of Silicon Valley Bank this month, brought its longstanding vulnerabilities into sharp relief and hastened its demise – highlighting just how panicked investors are.”

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