What future for Banks, and the UK budget

Blain’s Morning Porridge – March 15^th 2023: What future for Banks, and the UK budget

“Staring into the TV set, fighting fire with fire. Burning down the house! Get set for stormy weather…”

This Morning – SVB is done and dusted, and its time to ask questions, like: what is the future for banks? What do they do, and how do they do it? Are they at an evolutionary dead end? Probably. And the sheer joy that is the UK budget… stronger coffee please.

Today it’s a two part Morning Porridge: i) Some reflections on the collapse of Silicon Valley Bank – a somewhat frightening, but ultimately extinguishable chip-pan fire in the messy kitchen of global finance, and ii) The UK budget, which might actually be the start of something positive… (but probably won’t be.)

Part 1 – Banks at an evolutionary dead end

The collapse of Silicon Valley Bank turns out to be just one of these things. It has not destroyed Western Capitalism, brought low and shut off the wheels of industry, nor has it heralded the beginning of a new global depression. The last few days has exposed flaws, failures, greed and avarice, charlatans and wise men – but what financial foolishness does not? Swift and decisive action by governments, regulators and deposit insurance agencies saved the day.

It leaves us with some pretty big questions about who to blame. However, the big issue should be: Remind me, why do we need banks?

Financial crashes tend to be about money… but money is just money. The factors that power economies, growth and success are driven by intellect, inventiveness, innovation, skills, and smart marketing. None of these things are about money, but its money and banking that determines who and what succeeds.

The late, great Douglas Adams, writer of The Hitchhikers Guide to the Galaxy wrote:

• “This planet has – or rather had – a problem, which was this: most of the people living on it were unhappy for pretty much of the time. Many solutions were suggested for this problem, but most of these were largely concerned with the movement of small green pieces of paper, which was odd because on the whole it wasn’t the small green pieces of paper that were unhappy.”

Maybe it’s time for a rethink about the role of banks, the institutions responsible for moving money..!

Let’s be honest. What do banks actually do to justify their enormous worth? The bigger ones make billions, but are they an evolutionary dead end?

• In 2008 Governments had to bail out the global banking system from the consequences of bad lending – for all the right reasons.
• In 2023, Governments have blithely rescued depositors from the consequences of bad banking decisions – for all the right reasons.

The SVB crisis was not triggered by a sudden, massive, unforeseen, no-see-um risk catastrophic event, a credit failure of such magnitude to shake the foundations of finance to its core. Nope. It occurred because of bad banking, bad management, and getting the mechanics of processing the quicksilver of money fundamentally wrong. The stories about the avarice of the SVB management give me hope some of them will be going to jail..

Today, banks take limited lending and transactional risk – most of global risk is largely bourn across the investment sector and ultimately in your pension pot, but you still pay the banks to manage it. They process transactions and make payments – all things new FinTechs can also do; better and cheaper. The trick to banking is balancing deposits against their loans, and ensuring they have the liquidity to do so, while remaining solvent – which any decent AI with a grounding in duration and bond maths should be able to do better.

Solvency is the art of ensuring a bank (or insurance company) manages its investments and assets to prevent them failing, and making it “insolvent” – where losses on these assets will overwhelm the amount of cash the bank keeps to cover these losses, its capital. Well diversified banks will balance losses and gains across their asset portfolios, and keep sufficient capital to cover even extraordinary losses in check. Hence the regulatory regime of stress tests and constant reporting of the largest Systemically Important Financial Institutions – SIFIs.

However, very few banks die because they run out of capital – a solvency crisis. It’s usually liquidity that kills banks. That’s when it suddenly finds it hasn’t got enough cash in the tills. That may happen because fear and panic suddenly moves depositors to demand their cash back. If every depositor wants cash back at the same time, (and $42 bln was pulled from SVB in a single day by anxious Tech entrepreneurs), the result is an inevitable liquidity crisis.

When the bank failed, Government made the decision to make every depositor whole, largely to avoid the crisis that would have occurred if thousands of Tech workers didn’t get paid, and the Tech sector ran out of money while the bank’s asset books were unwound. The delays would have caused economic mayhem. Over time, the unwind would have seen depositors get their cash back – but slowly. However, the new defacto unlimited deposit guarantee means no one has to worry anymore about how well managed their bank is.

Today, banks are little more than processors of transactions in that most complex of commodities – cash. Cash is an ethereal thing… the magic of leverage means it moves, splits and forms and takes on corporeal form; being created every time a bank makes a loan (through leverage), or a central bank buys a bond, putting new money into the system.

Making depositors whole means the business of banking is no longer about keeping enough gold under the counter to anticipate and blunt runs on financial institutions. Bailing out the banks in 2008 highlighted the primary goal is market stability rather than market discipline.

All of which begs the question.. Why do we need banks in their current form? Everything they do can be done by others.

Much as it will surprise regular readers of the Morning Porridge, in this modern age of AI and ledger tech, maybe there is a role for technology here, in the form of Government techno-currencies (let’s not sully them calling them stablecoin or crypto) as a new form of money in a new banking sector. The possibilities are…. Intriguing.

Going to think about this more in coming days… but fascinated to hear what the readership thinks..

Part 2 – the unbridled joy of a UK budget

Today we have the treat that is the UK budget… As an established City Commentator with a modest following, tradition demands I write something about it. It’s going to be disappointing – it always is. The more boring the chancellor is, the better it is generally considered.

Apparently, this will not be as boring as we expect. Jeremy Hunt is going to announce a “Budget for Growth”. (I am very prepared to be very disappointed.) On one hand he will seek to demonstrate fiscal rectitude by slashing real spending across the UK economy and not giving into to the pay demands of public workers. He will still hike corporation taxes to 25% and then claim it’s a growth budget because he’s going to give lots of other things like capital allowances (actually cutting them, but presented as a gift) to business to make them more businessey…

Meanwhile, the UK will continue its’ slide into a dull, boring and fairly unspectacular recession as the slowest growing economy in this quadrant of the galaxy. (It’s so disappointing.. we used to be able to do recessions really well in this county… massive industrial collapses, mass unemployment, cloth-capped workers marching on Downing Street with their whippets..) Today, even our recessions feel lethargic…

But two aspects of the budget should stand out. On the plus side, we are anticipating a boost to free childcare, removing a major impediment to workers returning to the workplace, and taking a substantial burden off young families. Excellent. Can’t fault it.

On the other hand, Chancellor Hunt will also be allowing people to put more money into their pension pots, which is extraordinarily tone-deaf as less than 1% of the population will every reach the stage of having too much in their pension. It’s just another shot-to-the-foot in terms of favouring the rich and well off while the poor starve and freeze.

If I can stay awake, and no promises I can, I might just put out a comment this afternoon if there is anything remotely worth writing… I might just go do something less boring instead.. like calculating Pi to the nth degree..

Five Things To Read This Morning

FT                    Banks are Designed to Fail – and they do

FT                    US bank shares rebound after rout sparked by SVB failure

BBerg              Old-School Signature Bank Collapsed After Its Big Crypto Leap

Forbes             How Trump’s Deregulation Sowed The Seeds For Silicon Valley Bank’s Demise

WSJ                 Banking Is Always a Risky Business

Out of time, back to the day job, but off for a swim in the river first…

Bill Blain

Strategist – Shard Capital