Weeks ago Silicon Valley Bank became the second largest US bank of all time to fail. A host of other smaller US institutions followed. Then came the near‑collapse and buy-out of the Swiss giant Credit Suisse.
Pressure from events forced the US Treasury and the European Central Bank to bring in emergency funding for banks facing what they call a “liquidity crisis”. That’s what we know as running out of money. This move, and the way big banks dutifully bought out the failing smaller ones, led most commentators to suggest the crisis had passed.
Then one of the world’s biggest financial institutions, the 153 year old Deutsche Bank, hit trouble. Towards the end of last month, its share price plummeted and a whopping £27 billion was wiped off its market value.
Deutsche Bank shares fell sharply in part because of its own long-term failings, and a string of scandals. But it is part of a wider pattern of instability in the system. As part of their battle against inflation, central banks have piled on interest rate rises in a deliberate bid to tip the world into recession.
They hope that rising unemployment and falling wages will eventually cause a drop in demand. That in turn is expected to bring prices down. The problem is, that alongside all the other human misery that their policy causes, crashing the economy increases the likelihood that people and firms will be unable to repay their debts.
It also reduces savings, as people withdraw what they have left to cover their daily needs. This is already having a big effect on the sector, with banks increasingly short of money and carrying lots of risky debt on their books.
Following the spate of collapses, investors are now worried about the whole financial system. They are on the lookout for particular banks that might have weaknesses, and are ready to dump shares in them—even based on rumours. Here the process by which big banks bought up struggling ones has actually increased their fears.
When UBS bought the ailing Credit Suisse, part of the agreement was that a huge chunk of its riskier debts—known as AT1 bonds—would be written off. That meant those bondholders lost all their investment. That was good news for shareholders and the new owners, but is unprecedented in financial law.
The write-off spooked the bond markets. It sparked a sell-off of all kinds of debt, as investors started to worry that what happened to AT1 bonds could spread.
Market turmoil means it’s now more expensive for banks to raise the cash they need to function. That in turn adds pressure on those already thought to be weak.
It was through this process that Deutsche Bank became the next target, and no one knows which one will be next, or when. And, it’s not just the bond markets sending shudders through the system.
Marxist economist Michael Roberts sees other dangers circling. He points out that US banks are “heavily into commercial real estate assets”—offices, industrial estates, and supermarket malls, for example.
“But commercial premises prices have been diving since the end of the pandemic,” he writes. “With many standing empty earning no rents. And now with commercial mortgage rates rising from the (interest rate) hikes, many banks face the possibility of more defaults on their loans.”
That’s already leading to a wave of bad debts as property developers collapse. As a result, banks are making it harder and more expensive for firms to borrow money—and making it more likely that property prices will tumble still further.
At every turn, the financial sector faces turmoil, and bosses don’t always have an answer—except to make workers pay. But don’t expect to see bankers jumping from windows any time soon. They are secure in the knowledge that the central banks and states will usually be keen to help them out.
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