I am a self-professed admirer of Sir John Vickers’ work.  I recently re-read one of his papers, Some economics of Banking Reform (2012), and some excerpts really stood out to me as prevalent to last week’s failure of Silicon Valley Bank (SVB).  

For example, Vickers discusses how the business model for banks generally allows for borrowers and lenders to reconcile their position - until assets need to be liquidated before they are due. Vickers states that, “such assets cannot be liquidated before they are due to mature without serious loss, so banks are vulnerable to a mass withdrawal of deposits and/or the refusal of bondholders to refinance maturing short-term debt. Even perfectly solvent banks can be vulnerable to liquidity crises of this kind.” 

Eleven years ago, as we were still reeling from failures both sides of the Pond, our most coveted economists were fully cognisant to the reasons that cause Banks to fail. So why did this happen again? 

• We got too comfortable in a low interest rate environment 
• Homogeneity within your customers presents inherent risks 
• All banking – even retail – is a risky activity at the wrong times. 

Again, Vickers stated in 2012 that, “even for well-diversified banks, substantial losses are always possible, and for market economies to work satisfactorily the banking system must be able to absorb them…Such resilience was woefully lacking in 2008.” 

We could probably reword that last sentence to make it relevant today: “Such resilience is lacking as elements of the industry that are over-specialised have struggled to respond effectively to a higher-interest rate environment”.  

As SVB announced its capital raise, people feared the worst regarding the bank’s solvency. Panic ensued and as customers scrambled their cash away, the Bank’s liquidity position worsened rapidly.  

So, what have we learned? 

As we read stories of Founders and CFOs chatting on WhatsApp, deciding whether to stick with SVB or withdraw their deposits, we are reminded of the symbolism of customers queuing outside Northern Rock to withdraw their deposits (or loans to the bank). That visual representation of panic that led to a run on the bank may not be seen again, but herd mentality clearly still exists. 

On the surface, it looks as though some organisations are still making the same ‘mistakes’. They over-leverage, under-diversify; they have customer bases that respond in a similar way (VC backed start-ups are going to be particularly twitchy, not wanting to lose their hard-raised cash), and then struggle to react to sharp changes in the economic tide. 

Yogi Berra is attributed with the quote “It’s like déjà vu all over again!” and this springs to mind just as the clamour for reducing regulation was growing. I believe the events this March reinforces the need for ring-fencing and we need to remember why we had Structural Reform in the first place: not for when times are good, but rather for when times are bad.  

Get in touch 

The political and regulatory landscape within financial services is particularly turbulent and if you have any questions, comments or want to talk to any of our team, please contact Ewen Fleming or Rob Sargent in the first instance.