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Opinion | Bigger than Barings: banking crises have been averted, but how safe is your capital?
- Amid systemic failures and fear of contagion, authorities have acted quickly and sought to protect depositors
- But the challenge remains to ensure moral hazard, such that the people who make financial mistakes pay the price
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Why you can trust SCMP
On the morning of February 26, 1995, I was awoken in a Swiss mountain lodge by the BBC World Service news on my Sony shortwave radio. The signal was indistinct (this was pre-digital) and I gleaned through the ether that a famous British bank had gone bust – but I could not catch the name. I had to wait 30 minutes for the headlines, and a clearer signal, to hear that the 233-year-old Barings Bank had gone under.
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The collapse of Barings was very different to the recent banking crises in Europe, the UK and the US. It had sustained losses of over US$2 billion in today’s terms, a derisory amount compared to the US$54 billion that Credit Suisse went around borrowing to try and save itself last month.
Barings suffered from a lack of controls that allowed a rogue trader to build up a massive loss. The authorities avoided the issue becoming systemic or contagious for the financial system by managing a takeover of the remaining assets by the Dutch ING Bank.
Silicon Valley Bank is a niche financial institution that was rescued by the US authorities last month but was much bigger, if less famous, than Barings. It held the assets of many of the private equity technology industry’s start-up companies. Management’s mistake – and an obvious one – was to back its assets with volatile long-dated US Treasuries in a time of rapidly rising interest rates.
Treasuries are a fine investment in the right circumstances; but, as rates went up, the value of those bonds went down accordingly. The (mostly) very rich depositors, on merely hearing of the hole in the balance sheet, wanted all their money back immediately. The US Treasury caved in to support these very rich depositors with Uncle Sam Inc’s balance sheet.
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The really serious thread running through the bank failure was the possibility that there may be other careless, unhedged, schoolboy-like bankers out there who might also be holding too many Treasuries in their portfolios. This thread meant the SVB collapse was systemic and might infect the rest of the banking system, unlike the Baring’s crash.
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