Finance: genie out of the bottle
By Richard North - March 19, 2023
For all the seriousness of the Credit Suisse crisis, and its potential to trigger catastrophic damage to the global banking system, it doesn’t seem to be making a lot of big headlines and is certainly not dominating the front pages today.
In a way, this is only to be expected. Such crises are complicated, the jargon isn’t accessible to the journeyman hack, and it’s easy to say the wrong things and make matters worse, bringing down the wrath of the regulators and derision from the specialists.
Most of all though, there are no easy or safe predictions that can be made about the fate of Credit Suisse and whether, after the next steps have been taken, these will be enough to defuse the crisis and settle concerns about contagion.
In theory, the currently favoured option of a buy-out by the Swiss bank UBS should be sufficient to resolve the outstanding issues and settle the market – especially if the Swiss government steps in with overt financial support as a “backstop”.
According to the Financial Times, boards at the two banks are meeting this weekend. Credit Suisse’s key regulators in the US, the UK and Switzerland are considering the legal structure of a deal and several concessions that UBS has sought.
However, as Bloomberg remarks, there are a number of uncomfortable “unknown unknowns”. These are instilling a quiet sense of dread over “what comes next” for the broader banking industry, as bankers lose sleep considering possible scenarios, outcomes and second- and third-order implications from these outcomes.
From reading multiple reports, part of the problem – which emerged with the collapse of the Silicon Valley Bank (SVB) – is that banking crises are not behaving the way that they should, in line with traditional expectations.
This seems to be the view of David Herro, deputy chairman of Chicago-based Harris Associates, until recently the biggest investor in Credit Suisse. “Price action on the European banking sector is ridiculous”, he says. “You can’t paint every situation with this SVB brush, yet that’s exactly what happened with Credit Suisse”.
“Since the 2008 financial crisis”, he muses, “capital on banks’ balance sheets has more than doubled”. But, he adds, “look at technology and communications today. The minute something happens, it gets echoed around the globe, and I think that causes some very rash behaviour”.
This is not the first time the bank has been caught out in this way. Last year, when the bank recorded its biggest annual loss since the financial crisis, it haemorrhaged customers’ cash in the fourth quarter of 2022, with SFr111 billion flowing out.
Much of that related to a social media squall which had started in the October, when negative rumours about the bank’s financial health circulated on Reddit and Twitter.
Last week, amid the fallout from SVB, the same thing happened, only this with more intensity after the bank reported that “material weaknesses” had been found in its financial controls and Saudi tycoon Ammar Al Khudairy had refused to invest more in the failing bank.
The implications of this dynamic have not gone unremarked. Already, the Observer has run the headline: “‘The first Twitter-fuelled bank run’: how social media compounded SVB’s collapse”, stating: “The speed at which Silicon Valley Bank collapsed has left experts questioning whether social media has opened up entirely new risks in the world of finance”.
Says the newspaper, it was the speed at which market jitters spread across the world that forced bank executives and regulators to move with unprecedented swiftness to deal with the SVB crisis. Similarly, just hours after Credit Suisse’s share price plunged last Wednesday, the Swiss central bank stepped in with a $54 billion loan.
Stating the obvious, that paper adds that there’s nothing new about a financial emergency. But, it says, these crises – and their resulting responses – are unique in having been accelerated by a frenzy of social media chatter that has fuelled the panic.
One might recall that the Wall Street Crash of October 1929, which triggered the Great Depression in the United States, did not exert its full effect on the German banking system until the summer of 1931, when there were runs on German and Austrian banks and several of them folded.
From such leisured days, we now have a situation where anxious Twitter posts and WhatsApp exchanges, coupled with the ease of access that online banking provides, are seen by analysts as a serious catalyst for the current crisis.
Experts are suggesting that in the social media age, the psychological behaviour behind a bank run – mass fear from depositors of losing their savings – may be amplified and go viral quicker than bank officers and regulators can successfully respond.
Thus, we learn from Michael Imerman, a professor at the Paul Merage School of Business at the University of California-Irvine, that what happened to SVB was, “a bank sprint, not a bank run, and social media played a central role in that”.
With SVB, when the bank decided to raise funds through a sale of shares, the Venture Capital firm, Founders Fund, is reported to have told companies in its portfolio to move their money out of the bank. In the gossip-fuelled world of Silicon Valley, this news spread like wildfire. Customers withdrew $40 billion – one-fifth of SVB’s deposits – in just a few hours.
When other high-profile entrepreneurs sounded the alarm, this spread further on social media, resonating loudly with the bank’s customers who tended to be tech-savvy entrepreneurs keenly tuned in to online chatter.
Even the legislature has picked up on the phenomenon, with congressman Patrick McHenry, chairman of the US House Financial Services Committee, referring to “the first Twitter fuelled bank run”.
But, after complaints that some messages had proved to be misleading, Lindsey Johnson, president of the Consumer Bankers Association, issued a rather sour statement declaring: “The last several days represent a unique incident fuelled by misinformation on social media and are not indicative of the health of our industry”.
It is now said that regulators, policymakers and bankers are being forced to look at the role that social media may have played in the current upheaval and work out what they can possibly do to stay ahead of the rumours.
But, as the media and politicians have found – and most recently with the Lineker affair – such is the reach of social media that regaining control of the message is not easy. The banking system is not the only sector having to come to terms with the new reality created by the explosion in internet-based communications.
That said, it should not have taken a Twitter storm to bring down Credit Suisse. Such is the long-term reputation of the bank that it is a marvel that anyone might have thought that this was an institution in which it was safe to invest, or to deposit cash. Social media apart, the legacy media have been posting warnings for more than 30 years.
Even now, though, the progress of the rescue operation is being closely followed on Twitter, which is covering the potential pitfalls as well as positive developments. Any settlement achieved before the markets open on Monday, aimed at calming sentiment, could be quickly undermined by a run of bad news.
And yet, as Reuters observes, the conventional wisdom in banking is that there is no right way to respond when clients are pulling their money. Social media, therefore, may simply be pushing at an open door, expediting something that was going to happen anyway, rather than triggering it.
Nevertheless, the news agency notes that the usual argument for speaking up is to counteract negative rumours, which in Credit Suisse’s case had swirled on social media.
The typical counterpoint, it says, is that customers can take fright at anything that sounds like a liquidity problem, even if it’s explicitly denied. On the other hand, overly reassuring messages may bring accusations of misleading investors and depositors.
The best option in such circumstances might be a period of silence, but in the new world of social media incontinence, that might be an impossible aspiration. The genie is truly out of the bottle, and the bankers are far from alone in having yet to work out how to deal with the consequences.
