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RUBY:

From Schwartz Media, I’m Ruby Jones. This is 7am.

When you think about a bank run, you might think of lines around the block – of regular workers eager to get their hard-earned wages out of a troubled bank.

But recently there’s been another kind of bank run, one that plays out over group chats and email threads, involving Silicon Valley billionaires and cryptocurrency investors.

The panic among this group of depositors has already led to the collapse of several small and medium-sized banks in the US, and now that anxiety; it’s hitting other banks as well.

Today, associate editor of The Saturday Paper, Martin McKenzie-Murray on the trouble in the banking sector and whether there’s a contagion that could spread to Australia.

It’s Tuesday, March 28.

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RUBY:

Marty in the past month or so, we've seen the collapse of several US banks - SVB, Silvergate - and there are others that also seem to be kind of on the precipice as well and that’s raised a lot of questions, I think, about whether there will be more collapses to come and whether the financial system itself is at risk once again. To begin with, can you tell me about what we’ve actually seen so far?

MARTY:

In recent weeks we’ve seen the very sudden and dramatic collapse of Silicon Valley Bank, but also several other regional banks have collapsed or come close.

Archival tape – Reporter 1:

“Welcome back to the breaking news that we told you about earlier. Silvergate Capital is going to be winding down and liquidating its bank.”

Archival tape – Reporter 2:

“Meanwhile, Signature Bank marks the third largest bank failure in US history.”

MARTY:

Silvergate and Signature Bank are two that have dissolved.

Archival tape – Reporter 3:

“...rescue package to save First Republic bank, to try to halt the fear of this country, customers are lining up at these banks…”

MARTY:

And First Republic Bank was bailed out by several large Wall Street banks. And then there's Credit Suisse, which is a global giant.

Archival tape – Reporter 4:

“UBS has agreed to buy Credit Suisse in this historic, government-brokered deal aimed at containing a crisis of confidence that had really started to…”

MARTY:

Their dissolution was less surprising. They have been scandalised for years. There's rafts of litigation against them. And with the kind of heavy brokering and heavy encouragement of the Swiss government, Credit Suisse’s rival UBS bought them out at a great discount.

Archival tape – Joe Biden:

“All customers who had deposits in these banks can rest assured, rest assured they’ll be protected, and they’ll have access to their money as of today.”

MARTY:

So in order to ward against that contagion and people being bloody spooked and to ward against further bank runs, the US government moved very quickly to ensure all deposits, and that has helped to contain this.

RUBY:

And Marty, the most significant of these is probably Silicon Valley Bank, which you mentioned. It was the 16th largest bank in America, so what happened, how did it suddenly collapse?

MARTY:

It all happened very, very quickly and was the result of a bank run, which perhaps I should explain. But Silicon Valley Bank had this kind of interesting, almost unique place in American banking in that it was tailored for California's or Silicon Valley's tech start up industry, and it loaned money to venture capitalists. It began in 1983 and during the loosening of monetary policy and quite cheap money, especially at the beginning of the pandemic, it massively increased in size. Its assets quadrupled until New Year's Eve last year. In their annual report, they declared some $210 billion in assets, which is a quadrupling from just three or four years before.

Earlier this month, though, Peter Thiel, a co-founder of PayPal, an early investor in Facebook, a very considerable venture capitalist, his advisory firm started putting out newsletters or advising companies of Silicon Valley Banks’ exposure to risk. Now, in this day and age, that kind of warning spreads very, very, very quickly. And so newsletters went out, online forums were discussing it, Twitter was ablaze with ‘Peter Thiel thinks Silicon Valley Bank might collapse’. And what this precipitated was a bank run, which is effectively a contagion of fear. And so depositors, fearing an imminent collapse of the bank, want to be one of the first to withdraw their money, fearing that if it does collapse, they won't be able to get that money out. And that kind of fear or panic is contagious. And that's what we saw happen here. And in today's day and age, like we say, bank run, it can be almost an evaporation - it's that quick. So on March nine, $42 billion, about a quarter of their assets, were withdrawn in one day. Silicon Valley Bank scrambled to make that up by selling off their assets. It was already done. It was a fait accompli. And the federal government stepped in, dissolved the bank and put it into receivership and established a kind of transitionary bank which would be responsible for returning customers with their deposits.

The US government have now guaranteed all deposits. They have avoided the phrase bail out, which has a kind of dread resonance since the GFC, when we saw huge amounts of taxpayers money used to bail out reckless banks.

RUBY:

Right - so it sounds like Peter Thiel’s concerns about this bank travel fast, people get spooked, they withdraw their money en masse, and the bank fails, the US government steps in. So what were the actual concerns about the bank that prompted all of this?

MARTY:

There were warnings about Silicon Valley Bank's exposure to risk and questions, problems, fears about its risk management that were expressed by the Federal Reserve itself a couple of years ago. Now, the fears were this; One, that Silicon Valley Bank is kind of unusual in that it has a pretty undiversified customer base. They're principally very, very wealthy people with something to do with California's tech industry. So one crucial point here in all of this and one reason for its collapse is the FDIC, which is the Federal Deposit Insurance Corporation - in other words, the US government - insures customers deposits up to $250,000, and that's to ward against bank runs. If you fear a bank is going to collapse but, you know the government has guaranteed your money, it will return it regardless, then it kind of wards off you needing to anxiously withdraw it in the first place.

But $250,000 is the threshold. Now with Silicon Valley Bank, the vast majority, some 95% of customers, had deposits much greater than $250,000. In fact, the average account, the sum was $4.2 million. So let's say you, Ruby, are an average Silicon Valley Bank customer with an account of $4.2 million. Almost 4 million of that is uninsured. So with such a vast customer base that has so much uninsured money, there’s the exposure or the vulnerability to a bank run. So that's on the customer side.

On the investment side, a bank takes your money and then it needs to invest it, it needs to make money upon that money. What Silicon Valley Bank had done, quite recklessly, and it certainly surprised everyone I spoke to this week, was that they had invested heavily in US Treasury bonds, which were long term yields, often like a ten year maturity. And the irony here is that US Treasury bonds are considered quite safe. They're vanilla investments; there's far more reckless investment you could make. It wasn't that the investment in the US Treasury bonds itself was reckless, it was its over dependency upon US Treasury bonds. And what Silicon Valley Bank had failed to do is hedge against the risk of interest rate rises. So US Treasury bond value will decrease when interest rates rise. And of course the US, like ourselves, have been subject to quite dramatic and insistent interest rate rises. In fact, last week the Federal Reserve announced its ninth consecutive increase in interest rates in the US.

So on one side you had this kind of vulnerability to a bank run because of the huge number of customers with uninsured money. And on the other, you had this kind of recklessly undiversified portfolio that hadn't properly hedged against the risk of interest rate rises. Now, interest rate rises currently, to contain inflation, isn't a surprise and these rate rises have been happening for well over a year now in the United States. So Silicon Valley Bank, or banks generally, will diversify their portfolio so they're not singularly exposed. They're spreading their risk or hedging their risk. Silicon Valley Bank scandalously had not done that.

RUBY:

Okay. So a large amount of funds at the bank were not insured, and on top of that, the bank hadn't accounted for what might happen if interest rates were to rise. I mean, these sound like pretty fundamental kinds of principles for a bank to take into account. So how was this allowed to happen? How was the bank, I suppose, able to have taken such a risky strategy?

MARTY:

Well, in short, the dramatic unwinding of banking regulations that came into place after the GFC. And the people I've spoken to this week have expressed astonishment that such kind of negligent risk management could have happened so brazenly after the GFC.

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Archival tape – Barack Obama:

“Yesterday, Wall Street suffered its worst losses since just after 9/11. We are in the most serious financial crisis in generations.”

Archival tape – Reporter 5:

“Lehman Brothers is going bankrupt, and financial markets from Asia to Europe are doing their utmost to prevent Monday from turning from dark to black.”

Archival tape – Reporter 6:

“Lehman, like so many other investment banks and banks…”

RUBY:

Marty, after the Global Financial Crisis in 2008, regulations were put in place, in an attempt to prevent something like that from happening again. So what were those regulations - and should they have worked to stop what we’re seeing in the US right now?

MARTY:

The GFC was many things, but in part it was a profound absence of regulation. And during, well under the Obama administration, the Dodd-Frank Act was passed, just following the GFC - I think it became law in 2010. And what that did is to apply much more stringent regulation and stress testing upon banks.

One thing it did was also change the threshold at which a bank would attract that increased scrutiny. So it obliged banks to submit to much greater disclosure practices and to submit to stress testing. But the head of Silicon Valley Bank had lobbied quite strenuously for the unwinding of these things. And in 2018, under Trump, they were significantly diluted. One thing that that meant is the threshold for a banks being subject to this scrutiny increased. So from $50 billion in assets, in terms of the bank size, to 250 billion. And so if you recall earlier Silicon Valley banks assets, most recently were, at the end of last year, were about 210 billion. So that meant that they escaped or had wriggled out from that scrutiny. And this, once again, is incredibly galling to Americans to have seen this unwinding of regulation, to have seen a bank itself lobby for its freedom from these regulations and then to have run itself so recklessly and with poor risk management.

RUBY:

Yeah and I mean we've been talking about this very specific example of this bank in the U.S. and some of the bad investment decisions they've made within this bigger environment. But if we are kind of looking at the risk inherent in the kind of post GFC era of cheap money, is it the case that any financial institution could be affected? Could Australian financial institutions be affected?

MARTY:

There's a few things to be said here. One, banking failures are really quite common in America. We just don't hear about them. So this century alone, since 2000, there's been nearly 600 bank failures in the US. But they're usually very, very small. Silicon Valley Bank was the 16th largest in the country, and then following that there was the collapse of Silvergate and Signature Bank, two other regional banks. So obviously that there was a sense of deja vu, the GFC, is this contagion, people were pretty spooked. But there are significant differences from the GFC as well, to get to your point about Australia. Australia's banking system is very different to America's, both its regulatory environment, it's much more stringent and it's also vastly more concentrated than the US. So the US has myriad banks, often very small. We have hyper concentration of banks and you might say that it's kind of oligopolistic in character, but it also makes them very, very strong. They're large, they have great assets and they hedge well against risk. And one reason for that is they have so many assets they can diversify their portfolio effectively.

So Wayne Swan and other senior analysts and bankers that I spoke to said we are reasonably insulated with the GFC. You saw some of the world's largest banks collapsing and also like very serious entanglements and intricate kind of mutual dependencies. With Silicon Valley Bank and the other two regional banks that collapsed, Silvergate and Signature Bank, much smaller with more discrete customer base. Those kind of global entanglements don't so much exist. So the short story is, Australia isn't terribly exposed. What we are exposed to is US recession. If the US catches a cold, we tend to as well. There's an expectation the US will enter recession. But in terms of financial contagion or a repeat of the GFC, the people I've spoken to are kind of cautiously optimistic.

RUBY:

Okay so the message is that Australia at least, shouldn’t worry. We’re not exposed, there won't be some sort of contagion, and it’s unlikely that there would be a crash. If we shouldn’t worry now, at what point might that change? What would it take for our financial institutions to actually be exposed?

MARTY:

So the conversations I've had, including with the former federal treasurer Wayne Swan, do counsel reassurance, and they do stress that Australia's regulatory system and the health of its banking system is vastly better than the United States and our exposure is limited. But this is a period of huge readjustment and as everyone's stressed, the era of cheap money is over and it's well beyond my competency to offer any forecasts. But whilst I think there's no grounds for panic, I think of something Wayne Swan said, which is ‘what other weaknesses are around’? So he's relatively confident, but he says we shouldn't delude ourselves into thinking that we know everything. It's a period of enormous readjustment and banking regulations is one thing, but the behaviour of people is another and when panic sets in, it can spread incredibly quickly.

So the Federal Reserve needs to I mean, they won't speak so explicitly, but pain is kind of part of the point in containing inflation. But they, it's very difficult. It's very difficult to calibrate that perfectly. And they face a very difficult trade-off now between containing inflation, minimising financial volatility and hoping they don't blow the whole system up in trying to do that.

RUBY:

Marty, thank you so much for your time.

MARTY:

Thank you.

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RUBY:

Also in the news today…

Archival Tape – Adam Bandt:

“The Greens, through the negotiations, have secured a big hit on coal and gas. There will now be, in legislation, a hard cap on actual emissions that the safeguard sector can emit.“

RUBY:

Leader of the Greens Adam Bandt has announced his party’s support for the safeguard mechanism, following months of negotiation over Labor’s keystone emissions reduction policy.

The parties had argued over the Greens unsuccessful demand for no new coal or gas projects, in line with the IPCC recommendations to limit global warming to 1.5 degrees.

Instead, Labor has agreed to a hard cap on emissions, which Bandt says will prevent the government from green lighting many of the fossil fuel projects awaiting approval.

And,

Victorian Liberal MP Moira Deeming will remain with the party, following calls for the Liberals to expel her over her participation in Kellie-Jay Keen-Minshull’s Melbourne rally.

Deeming spoke at the anti-trans rally, which was attended by neo-nazi groups performing nazi salutes. She was later filmed drinking champagne with the far right provocateur.

Deeming survived the vote to expel her from the party, but faces a nine month suspension, after which her membership will be reviewed.

I’m Ruby Jones, this is 7am, see you tomorrow.

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