Worries about the balance sheets of banks has fueled turmoil in global markets amid fears that this could mark the start of a bigger financial crisis. Looking beyond the current turmoil, however, there are some broader implications for both the financial system and the changing world order.
While the increase in interest rates has put the balance sheets of banks under pressure (see graph), digital technologies have made bank runs more likely. With the rise of mobile banking, customers are more likely to withdraw their deposits at the first sign of trouble. Indeed, the loss of confidence in Silicon Valley Bank is being called “the first Twitter-fueled bank run”. The head of Credit Suisse also blamed the bank’s failure on a “social media storm“. The higher probability of bank runs has put governments in a difficult position: whereas bailouts of banks are politically unpopular (especially since the financial crisis of 2008), recent events show it is virtually impossible to privatize losses fully when banks experience a loss of confidence. As a result, governments are once again saving their banks, which will lead to more regulation of banks’ activities, and – in turn – boost momentum for alternative forms of financing such as direct lending, asset-backed lending and trade finance. These types of financing will continue to play a more significant role because of fewer ties to the government, lower leverage and less interconnectedness with the broader financial system.
We should take a step back and examine the broader implications of the saving of Silicon Valley Bank (SVB) and Credit Suisse. The Swiss government forced the takeover of Credit Suisse by UBS in order to protect the Swiss financial ecosystem, one of the central pillars of the Swiss economy. Similarly, SVB sits at the center of America’s technological rivalry with China, which the US government is increasingly allocating resources to. Saving these banks is thus a matter of governments protecting their economy during a time of uncertainty. Indeed, the collapse of SVB and Credit Suisse has occurred not only during the highest interest rates in 15 years (so far), but also during the biggest international conflict in more than 30 years. It is during a time like this that governments aim to insulate their economies from foreign threats by creating autarky (or self-sufficiency). Looking forward, governments will increasingly take extreme measures to protect their assets, which are not limited to banks, but could also include natural resources, technology and key infrastructure.