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The American President Joe Biden, as well as the European authorities, tried yesterday to reassure the markets and investors after the massive bankruptcy last week of the Californian bank SVB – Silicon Valley Bank, known for its privileged links with the technology sector, which triggered the bankruptcy of two other institutions more closely linked to the cryptocurrency sector, Signature Bank and Silvergate Bank.
Last week, remember, the SVB bank launched a capital increase of 1.75 billion dollars to consolidate its balance sheet, causing a 60% drop in the price of its shares, which generated a movement of panic among investors. According to specialists, this situation, together with the lack of supervision by the regulatory authorities, may have precipitated the bankruptcy of this bank.
Reacting yesterday to what is considered the most serious bank failure since the financial crisis of 2008, the American President declared that “Americans can trust in the soundness of the banking system” and guaranteed that taxpayers will not have to pay anything for this occurrence. Joe Biden warned, on the other hand, that shareholders would not receive “protection” against losses.
Worldwide, stock exchanges have experienced some disturbances, but according to the rating agency Moody’s, this should have a limited impact on European establishments. Despite a general calm on the stock exchanges this Tuesday, the fear of contagion in the world banking system is not far away, as happened in 2008, says economist Bruno Damásio, consultant at the OECD and professor at Universidade Nova de Lisbon.
RFI: Under what circumstances did this bankruptcy occur?
Bruno Damasio: There is a structural situation here. We know that financial systems in general are weak systems, especially in times of turmoil like the one we are experiencing now. It should be noted here that this was a sizable bank that was among the twenty largest in the United States in terms of assets. This is the biggest bank failure since 2008. This was a bank very established in the business area, especially in the technological sector, namely many ‘start-ups’. It was perceived that there was some financial engineering involved, as the bank’s balance sheet did not reflect its real situation. There was a lack of liquidity and capital essentially caused by a massive run by the bank’s customers and a situation of panic was generated. Customers started withdrawing whatever money they had for a variety of reasons, out of panic but also out of liquidity needs. This combined with a rise in interest rates, which on the one hand discouraged risky investments and on the other hand penalized the banking sector on the stock exchange. The bank’s assets devalued and therefore, from then on, what we know happened, the bank went bankrupt with potentially very problematic consequences.
RFI: In recent days there have been messages both from the United States and from Europe in order to reassure the markets in the face of this bankruptcy. Is there no risk of contagion? Is there no risk of a scenario similar to the one that happened in 2008?
Bruno Damasio: I believe there is. Naturally, they are fulfilling their role, reducing panic, reducing contagion. So there is a symbolic pressure here also in this case. Now, if we continue with this policy of raising interest rates, which penalizes not only the banking sector in general, but also populations in particular -and a lot of them- the rise in interest rates is having dramatic effects on people’s lives , I am convinced that the situation will not end there and what is foreseen will not be pretty to look at. Firm policies are needed. Incidentally, we realize that there are two weights and two measures here regarding the way this bank is being treated by the US administration. Now, nothing guarantees us -and frankly, I am particularly worried- that this bankruptcy will not have strong side effects and that it will in some way extend to the entire financial system, not only in the United States, but also in the western world in general, because the financial systems western countries are weak financial systems that, in times of turbulence, the structural problems they suffer from become raw.
RFI: In your opinion, what would be necessary to avoid the reproduction of scenarios of this kind?
Bruno Damasio: Deep institutional reform would be needed. Policies that serve the interests of the people would be needed. We see the financial sector that is essentially at the service of large, eminently speculative capital. There needs to be price control, namely interest rate control. If these delirious policies of interest rate hikes continue to fight inflation that is not even on the demand side, I have no doubt that the financial system will sooner or later collapse again. By the way, this is the genesis of capitalism, this is how things work.