For years, Spanish speakers used to translate “Silicon Valley” as silicone valley, showing not only the error of confusing the correct translation of silicon but, above all, ignoring the technological revolution around the application of this mineral to the development of computing. We have already learned our lesson and now, delivered to the apparently unfathomable frontiers of Artificial Intelligence, this American Valley appears to us again, which gives its name to the recently bankrupt bank and intervened by the Federal Administration of that country.
The fear of walking towards a bank run –massive withdrawal of deposits– is inevitable, especially since the origin of the bankruptcy of Lehman Brothers bank on September 15, 2008 and of Silicon Valley Bank (SVB) there is a common cause; the rise in interest rates by the FED; the US central bank. In the years leading up to the 2008 crisis, the Fed raised interest rates to – among other things – curb the housing bubble. The most serious consequence was the extension of defaults on subprime mortgages that had been granted to buyers who were now unable to repay the loans. The rest had been done by financial engineering, building financial derivatives of these doubtful debts that, despite their risk, had been backed by the agencies (mainly three for the entire planet) in charge of putting a “note” on their quality.
The strong link between American and British banks through the large banks located in the so-called “city” of London made it easier for the bank panic to cross the ocean – like a collapsing aligned domino. The lessons learned from that crisis that was not overcome until 2015 were several. One of them, the one that interests us the most, were the so-called Basel III agreements that now regulate the practices of financial institutions of almost all entities in the world and that are aimed at avoiding new situations of lack of liquidity and bank insolvency. Pursuant to this agreement, banks undergo periodic “stress” tests to see if their investment portfolio (mainly the loans they grant) is healthy enough to withstand different levels of economic recession.
If this were all, the actions of the Joe Biden administration guaranteeing every penny of deposits in SVB accounts should be enough for both the US and most of the world. But it’s not all.
The COVID-19 pandemic maintained the ultra-expansionary monetary policies that, for example in Europe, had been applied to clean up banks and shake off the financial crisis that began with the bankruptcy of Lehman Brothers. Part of these measures consisted of injecting money through the banking Eurosystem -essentially the European Central Bank- through operations called «targeted longer-term refinancing operations» (TLTRO), or what is the same, long-term loans to banks conditional on actually reaching companies and families to reactivate demand. These loans were granted to financial institutions with interest rates of -1% during a few years in which inflation was at its lowest. The Bank of Spain itself has verified that most of this money was used by the banks to reinforce their reserves and to grant the loans for which they were designed.
The amount of money injected in this way by the ECB amounts to 1,257,951 million euros (February 2023) and is recorded in heading 5 (Loans in euros granted to credit institutions in the euro area in relation to policy operations monetary). In relative terms, it is not a minor magnitude, since it represents 16% of the ECB’s total assets.
Given this magnitude, a question that should concern us is how exposed these loans are to interest rate rises. I don’t know the answer, but it does seem that the touted rises in interest rates to rein in inflation are losing vigor given the risk of a return to the 2008 explosion, even when the float of the Basel III demands is involved.
- Jose Manuel Cansino He is Professor of Applied Economics at the University of Seville, professor at San Telmo Business School and academic at the Autonomous University of Chile / @jmcansino