The fallout from the collapse of Credit Suisse and a handful of US banks will prove a “game changer” for global financial policymaking, forcing a re-examination of the role of deposits, culture and cross-border co-operation, City of London bosses told the Financial Times.
The FT’s City Network — a group of about 50 senior figures in finance and policymaking — made the prediction in response to a callout on whether the recent calamities should prompt policymakers to “rethink their plans for financial sector deregulation”, a reference to the UK government’s plans to boost the City’s competitiveness by reducing red tape.
“It is now much more fundamental than deregulation,” said Michael Tory, co-founder of advisory firm Ondra. He added that the real question was about the “sustainability of fractional reserve banking” that underpins the banking system by allowing institutions to hold some of depositors’ money in liquid assets and lend out the rest.
“We’re now going to have the debate that we did not have in 2007/08 . . . [when] there was zero appetite to force a wholesale change in the structure of banking,” Tory said. Recent events had proved that “a deposit base is no longer the stable source of funding that it has, by and large, been ever since the introduction of deposit insurance in the Depression”, he argued.
Credit Suisse was forced into the arms of UBS after a run on deposits so severe its regulators believed the bank was days away from not being able to honour requests from customers. San Francisco’s Silicon Valley Bank faced withdrawal demands of $40bn of its $170bn deposit book in the 24 hour period before regulators seized control.
Global policymakers, including Bank of England deputy governor Sam Woods, have said they may revisit liquidity rules designed to prevent bank runs. Woods told the Treasury select committee last week that they could not move to a “zero risk” system where 100 per cent of deposits were instantly accessible.
Mervyn Davies, a former UK trade minister who now chairs LetterOne and is a senior adviser of Corsair Capital, said US regulators’ decision to rescue all depositors caught up in the recent collapses “changes the global game”.
The US controversially offered depositors of SVB and Signature Bank immediate access to their funds, including sums above the $250,000 covered by the US deposit insurance guarantee scheme. Regulators justified the decision on the grounds of protecting financial stability.
“If the largest economy steps in to save depositors, other countries will have to follow suit,” Davies said, arguing that “we cannot have the US going in a different direction to the UK and Europe”.
Paul Drechsler, president of the CBI, also argued for greater global co-ordination following the failures in Switzerland and the US, both of which deviated from globally-agreed post-crisis rules on banking resolution.
“I cannot see how regulation on a nation by nation (or region by region) basis can sustain a global financial system without some very clear and shared global rules of engagement,” Drechsler said.
Anne Richards, chief executive of Fidelity International, also made the case for “revisiting” global rules around banking or crafting “entirely new ones” in light of the handling of recent failures. “It is pretty clear that the Credit Suisse rescue has set back the concept of prevention of ‘too-big-to-fail’,” she added.
Robert Swannell, former chair of UK Government Investments, said the “key lesson” of Credit Suisse and SVB’s failures was that “culture trumps everything”. “If regulators don’t feel they have found a way to understand and assess this aspect of banking yet, and how best to enforce it, then it’s about time they did,” he added. “I think this will be more productive than yet more complex regulation.”
Douglas Flint, chair of asset manager Abrdn, said the failings at Credit Suisse and SVB were “basic and it seems recognised but not acted upon”.
“It’s not about inadequate regulation — including having the right people in management and boards with the right incentives — it’s about applying the oversight, governance and supervision controls within current regulation forcefully,” he added, decrying any “knee jerk reaction that there needs to be more regulation”.
The CityUK chief executive Miles Celic also argued against responding to the recent failures by rushing to draft tougher rules.
“We risk sleepwalking into an endpoint where our society’s default view is that no institution must ever be allowed to fail and that any failure is somehow due to dereliction of duty by the regulators and government,” the lobbyist said. “Such an approach is hardly one that will help us address the challenges of growth, productivity and innovation that exist in the developed world.”
Stephen Jones, head of investment banking at Panmure Gordon, urged regulators to push ahead with capital markets reform rather than throwing it out “in the race to (rightly) debate relaxation or otherwise of bank regulation”.
Still, Flint and several of the respondents pointed to the need to improve regulation of banks with less than $250bn in the US, after the failure of SVB and other “non-systemic” banks shook confidence in the entire US banking sector.
Those banks were excluded from global rules on capital and liquidity under a 2019 deregulatory push from the Trump administration.
US president Joe Biden on Thursday called on regulators to toughen rules for large regional banks, something that the Federal Reserve has already said it will examine.