Even ahead of the outset of the recent SVB- sparked outbreak of banking sector nervousness, bank regulators on both sides of the Atlantic had said stresses would appear as a result of the end of QE and the upwards cycle in world rates in unexpected corners of the global financial system.

It was an insightful comment, because it focusses attention on those areas and, importantly, the reasons for those unexpected stresses.

Looking back over the past six months we have seen such examples – Silicon Valley Bank, a mid market US bank, Credit Suisse, a Swiss headquartered SIFI, and the UK sovereign itself, in the form of the gilt market turmoil that preceded the demise of UK Prime Minister Liz Truss in November.

In all cases cited above it is significant that the sources of the stress have been to be found in imprudent balance sheet risk management – the SVB case being a failure to follow basic 'Banking 101' economics principles, – that of matching the maturity profile of assets and liabilities to minimise interest rate mismatches. Similarly, the UK sovereign debt jitters derived from an adventurous approach by the short-lived Truss-led Government that saw the OBR stood down and conjectural tax and revenue forecasts replacing the tried and tested formulas of the UK gilt markets. A similar root cause lies at the heart of Credit Suisse’s demise.

All three of the above cited cases fall into the category of cases of poor risk management provision. Another might be added - actions and tools employed by the regulators themselves - for example the US Fed’s Reverse Repo facility, brought in during the GFC which have been having an unintended result - of draining private bank deposits back into the Fed (see page 4).

All the while, the global interest rate cycle has been unfolding. Since the Global financial crisis, Governments have accompanied their regulatory fixes of the impaired world banking system with QE, and the lowest interest rates in the history of the human race*.

The loose money that accompanied regulatory repair after the GFC got an extension thanks to the global response to Covid in 2020-21, and in the early months of 2022, late in the day, Putin’s Ukraine gamble sparked the take off in inflation. One of the first to signal this was Lord Mervyn King, former Governor of the Bank of England (see Finance Dublin, March 2022). His analysis was quickly picked up by his peers in the Fed, the ECB, the Swiss National Bank, and elsewhere.

To date, the suggestions are that the recent SVB-related jitters are localised, occurring in unexpected corners, and for reasons that are well understandable to those prudent enough to apply proper risk management to their balance sheets, and, at regulatory level, ensure that the regime in place fosters such good management at each and every enterprise level.

Source: “A History of Interest Rates”, Sidney Homer and Richard Sylla, third ed., with a foreword by Henry Kaufman. Rutgers University Press 1996.