Banks, if the decision to save them with taxpayers’ money weakens democracies – Corriere.it

“Our shadows are bigger than our souls.” It’s a pass of stairway to Heaven, famous song by Led Zeppelin. If the quote is legitimate, and doesn’t shock music critics, these are words that fit perfectly with what happened in the last financial storm. The shadows (on the stability of the system and on the banks’ balance sheets) appear, despite the assurances, to be even greater; the souls of the protagonists (especially Swiss and American bankers, some supervisory bodies but not the ECB) on the contrary, dangerously modest.

Paradise in Earth?

The interpretation of the lyrics of the song leaves ample room for ambiguity. Does the stairway really lead to heaven or hell? Heaven on earth exists for all those who, by not paying a pledge for their mistakes, not only get rich but pass the cost of their inexperience (when not negligent or malicious) on the community. The moralhazardthe moral hazard that all the governors – the last solemn words of Joe Biden after the failure of the Silicon Valley Bank – and the supervisory authorities say they are fighting, in the end is even rewarded.

The bondholders

On the other hand, the ladder leads to hell for Credit Suisse bondholders who, however, unlike what happens for the holders of At1 hybrid bonds in other countries, had signed a contract which exposed them to penalties equal to those of the shareholders. It is also striking that Credit Suisse was among the 30 large groups that the Financial Stability Board – whose headquarters, ironically, is in Basel – considers to be at systemic risk and therefore subject to strict rules and rigorous controls. On paper. Meanwhile, the crunches widen. And fears also affect a German giant like Deutsche Bank which, like the Swiss bank, especially with its London branch, is exposed to investment banking and derivative products. Worried about the stability of the markets, the value of invested savings and the solidity of financial institutions, we underestimate other “infernal” consequences.

Moral hazard

Every time moral hazard wins (with taxpayers’ money) Western representative democracy — with all its values ​​that it proudly defends in its support of Kiev against Moscow — weakens. There is no market that records these permanent damages to citizens’ trust in their countries’ institutions, not just economic and financial ones. If there was, we’d be more concerned about it. Certainly a Swiss intellectual like Tobias Straumann, historian of the University of Zurich who analyzed – in an interview on The temperatures — the effect of the loss of reputation of the Confederate elites in the Credit Suisse scandal. And since it is a mature, envied, admired, even direct democracy, a model for other nations, the alarm sounds louder.

Executive bonuses

In Switzerland it follows the controversy over the emergency right, invoked by the Federal Council in the period of Covid (to combat which Bern has spent 50 billion francs, less than a quarter of the amount mobilized to convince Ubs to buy its rival, equal to the entire public debt) and the generous federal guarantees granted, even if not used, to the energy giant Axpo. On March 24, bonuses to Credit Suisse executives were paid along with salaries. Even to those in management and top management who are held responsible for the long-term mismanagement that will cause, in addition to losses for savers, an avalanche of layoffs as an inevitable consequence of the forced merger with Ubs.

The picture

A photograph published by Financial Times Thursday sees police officers patrolling Credit Suisse’s Zurich headquarters. Unthinkable image, absurd only a few days before. If all this shakes the foundations of a great democracy, the others must not feel so good either. Nor should the consequences of the failure of Silicon Valley Bank on the popular mood and on the choices of the American electorate be underestimated. Federal Reserve and Fdic (Federal deposit insurance corporation) intervened belatedly to stop the contagion.

The deposit guarantee

The decision to guarantee deposits above $250,000 was probably inevitable. But it is difficult to justify the extension of the public guarantee even to those account holders (90% of customers) who had deposited considerable sums, proceeds of fundraising of technology and life science companies. Certainly not ordinary savers. Account holders who, faced with the need for working capital or more profitable jobs, withdrew their deposits causing the collapse of the institution which had invested entirely in government bonds, depreciated by the increase in interest rates.

The vigilance

Silicon Valley bank operated (and will continue to do so) in the celebrated California, envied but also detested for the too much wealth that has accumulated over time, and which is not taxed much, in an increasingly unequal society. A deposit guarantee for all, even if limited to one case, can be perceived not as a supervisory strength but as an unbelievable promise and above all unsustainable on a general scale. So, in the end a sign of weakness. An interesting study by Erica Jiang, Gregor Matvos, Tomasz Piskorski and Amit Seru (Monetary tightening and US bank fragility in 2023) estimates the book value of the equity of the American banking system — without the possibility (held to maturity) to take into account the falls in the price of securities, a consequence of the sharp rise in interest rates – 2 trillion dollars, lower than that declared in the financial statements of the institutions.

Uninsured deposits

In addition, 23% of US banks have uninsured deposits. If half of these current account holders – as SVB’s customers did – decide to withdraw their accounts, at least 190 institutions would be at risk. The leverage effect does the rest. In an article on Financial Times, Robert Armstrong reported the words of a great fund manager, Terry Smith, worried that some banks have as much as 20 dollars of assets against a single dollar of capital. And the latter, with a 5% loss in investments, would end up cancelled. “We forgot too quickly – comments Marco Onado, professor of financial institutions at Bocconi – the lesson of the 2008 crisis. The Dodd-Frank law remedied the disasters of the universal bank, reintroduced with the cancellation, in 1999 in was Clintonian, of the Glass Steagall Act of 1933. However, the so-called deregulation had begun in the 1980s and led to the very serious collapse of Savings and Loans. The separation between commercial banking and riskier investment banking was then largely undone under the Trump presidency. And who was one of the most active lobbyists? Just the head of Silicon Valley Bank, namely Greg Becker. And we forgot that the seeds of populism are sprouting right around that time, with the Tea Party on the right and Occupy Wall Street on the left.

The costs for democracies

In the 1930s, American politics had the courage to corner big banks, such as Jp Morgan. Today the power relations seem upside down. AND to the expression too big to failtoo big to fail, we should replace too big to savetoo big to save. Or rather, we would add, too big not to be saved without an (inmeasurable) cost on the representative democracies of a market economy.

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