A week-and-a-half after the second-largest bank failure in American history ignited uncertainty throughout the global economy, experts warn bank failures and the stabilisation measures taken by the Federal Reserve and Wall Street are creating even greater bank consolidation – and might further pave the way for a central bank digital currency (CBDC).
Silicon Valley Bank’s (SVB) collapse earlier this month led to the collapse of Signature Bank, the voluntary closing of Silvergate Bank and the takeover of all three banks by the FDIC.
In response, top credit rating agency Moody’s lowered the outlook for the entire US banking system to “negative.”
Now the banking crisis is spreading to Europe. Swiss regulators engineered a “forced marriage” between UBS and the troubled Credit Suisse this past weekend as part of an effort to stabilise the bank in the face of increasing concerns that a major financial crisis is imminent.
The collapse and downgrading of these banks have bolstered the position of what has come to be called the systemically important banks (SIBs) – financial institutions whose failure could trigger a financial crisis.
These “too big to fail” financial institutions — which include JPMorgan Chase, Bank of America, Goldman Sachs, Citigroup and Wells Fargo, among others — have been inundated with billions of dollars of new deposits “as smaller lenders face turmoil,” the Financial Times reported.
This happened despite the fact that the federal government stepped in to guarantee all of the deposits of SVB and Signature clients last week. This series of events led analysts to raise questions about how this might open the door to the Federal Reserve’s exploratory plan to launch a CBDC.
Independent journalist and political commentator Kim Iversen said a CBDC is the Fed’s “end goal.” She predicted further consolidation of smaller banks into larger ones will make it “that much easier to roll out a central bank digital currency and social credit score for us all.”
Iversen added: “You want to control someone, control their money and that’s ultimately the end goal.”
Catherine Austin Fitts, founder and president of the Solari Report, told The Defender the financial instability we are seeing now is “a symptom of a mismanagement of the federal credit by the Fed and the US Department of the Treasury over a very long period of time.”
She said the goal of their economic management strategies has been “to centralise control and centralise money.”
Economist Jeffrey Sachs explained that the direct root of the current crisis is the tightening of monetary conditions by the Fed and the European Central Bank after years of expansionary monetary policy.
For the last few years, they both kept interest rates near zero and flooded the economy with liquidity in the form of quantitative easing – or “printing money” – and then with pandemic response measures, which led to inflation.
Both central banks are now tightening monetary policy and raising interest rates to staunch inflation.
Federal regulators encouraged banks to invest long in treasury bonds and mortgage-backed securities, Austin Fitts said. But these long-term investments were made with short-term deposits.
The banks purchased these instruments when interest rates were low, but when the Fed began aggressively raising interest rates, the value of the banks’ portfolios went down.
Fitts also pointed out that SVB’s loan portfolio – like that of Signature and Silvergate – was composed of life sciences and biotech start-ups – speculative industries with loan repayment based on successful initial public offerings.
As the economy cools, there are more defaults and slowdowns in this type of loan portfolio, she said.
Regulatory changes made under the Trump administration, which rolled back some requirements on mid-sized banks, meant these banks were able to drive up their number of uninsured bank deposits, The Lever reported.
SVB and Signature Bank went to extremes, with uninsured deposits at 94 per cent and 90 per cent, respectively, according to the Wall Street Journal.
In the case of SVB, as clients saw inflation was driving down the value of the bank’s assets, they began to pull out their cash. As more people became alarmed about the bank’s reserves — particularly when Peter Theil told the portfolio companies in the Founders Fund to take their money out of the bank — it effectively created a run on the bank.
“It looked to me like a game of economic or political warfare, or both,” Austin Fitts said. She said different people could have political or economic reasons for wanting to crash a bank, but that it was difficult to know whether such allegations were true.
Many in the world of crypto argue these banks were taken down because they had some of the biggest stakes among banks in the nation in the cryptocurrency industry.
Signature Bank, the second bank to fail, had crypto clients that included USD Coin – digital currency that is fully backed by US dollar assets – stablecoin issuer Circle, the crypto exchange Coinbase and Fireblocks, the funds transfer network for cryptocurrency settlements and payments.
Former US Representative Barney Frank, one architect of the Dodd-Frank reform legislation drafted after the 2008 financial crisis to tighten legislation on large banks and a former Signature board member, told CNBC that there was “no real objective reason” Signature had to be seized.
“I think part of what happened was that regulators wanted to send a very strong anti-crypto message,” Frank said. “We became the poster boy because there was no insolvency based on the fundamentals.”
Silvergate Bank, the third bank taken over by the FDIC, had announced plans to voluntarily liquidate on March 8, after a crypto-market plunge spooked depositors.
The Fed and the Department of the Treasury quickly stepped in last week, issuing a joint statement that a guaranteed bank-deposit insurance fund would cover the deposits of account holders at SVB and Signature, beyond the $250,000 usually covered by FDIC.
The Federal Reserve is making additional funds available to banks through a new “Bank Term Funding Program,” which lends banks money against their US Treasury securities, mortgage-backed securities and other collateral, which is how many banks hold their reserves.
This new programme would allow banks to borrow against their securities at their full value, even though they are currently trading well below that value, potentially putting the government at risk of taking on the future losses incurred by the banks.
Critics say this is essentially quantitative easing – the government strategy of “printing money” – in a new form.
Some analysts like Matt Stoller, research director at the American Economic Liberties Project, are critical of such bailouts, pointing out that they continue to reward risky financial behavior that banks like SVB engaged in with their clients – offering below-market loans and other benefits common in Silicon Valley.
But in an interview with comedian and political commentator Jimmy Dore, tech investor David Sacks argued there is a larger issue at stake. If the Fed hadn’t stepped in, he said, all of the money would have ended up with the top four banks.
“The person who is licking his chops over this whole thing, who doesn’t want a bailout of the regional banks, is Jamie Dimon because he manages JPMorgan Chase, the biggest bank,” he said.
The Washington Post also reported that as a result of the bank collapses, billions of dollars flowed from small and regional banks into the coffers of giant banks such as JPMorgan Chase and Bank of America – a shift that likely means “greater consolidation of the banking industry.”
This will have dire implications for regional banks, which “will need to pay more for funding, either by raising interest rates on deposits or by paying higher lending costs in the wholesale market.”
Marty Bent and Michael Krieger, who spoke with investigative reporter Whitney Webb on a recent episode of her podcast, “Unlimited Hangout,” argued that regardless of the Fed’s intervention, we are still seeing a move toward bank consolidation (and ultimately a CBDC).
- A Tell / The Defender report / By Brenda Baletti, a reporter for The Defender