The first storm of the banking crisis. It started in Silicon Valley Bank (SVB), and now there are more and Europeans are infected. It can be wind that subsides or shakes more strongly, there are projections in all directions. Almost everyone agrees on one thing: credit and the economy will further slow down.

What happened? First step: the very bad monetary policy of the US FED (not to pretend to be wise, I have said this many times here). It is absurd to keep interest rates low for so long, because it always creates inflation, but also deeply weakens the economy: inappropriate investment decisions are made (driven only by cheap borrowing), banks have assets that are not the best, and there are bubbles in almost all assets. Then there was a very late and hectic growth, from 0.25% to almost 5% in nine months. And that’s where all the accumulated weaknesses are revealed. I recommend reading the Austrian School of Economics on how this creates dangerous cycles, which is why I always tell my students about the first “smiley” phase, then the “unhappy face” phase.

Silicon Valley Bank: 3 Differences Between the Collapse of This Financial Institution and the 2008 Banking Crisis

Control of banking crises

A specific case of SVB. First, it had a lot of deposits, especially from technology companies, invested in US government bonds with maybe 1% yields (few loans, because those companies had a lot of money) and when interest rates rose, the price of those bonds automatically fell. Second, tech companies ran into trouble, it was harder to raise capital, and they pulled some of their deposits to operate. Third, the combination of lower asset (bond) values ​​and falling deposits worries clients, who also warn that their deposits are not protected by government insurance (it reaches $250,000 compared to much larger deposits in SVB), leading them to withdraw their funds. And the bank fails because it does not have enough liquid and valuable assets, which is common in banking crises.

Could something similar happen in Ecuador? I don’t think so. (…) Ecuadorian banks have much higher liquidity.

The Swiss central bank is launching a bailout for Credit Suisse

How and why does the state intervene? There is a risk of contagion because banks do business with each other and clients think: shouldn’t I withdraw money from my bank, just in case? And one more thing: there was a fear of breaking the payment chain in the technology sector (not paying salaries, suppliers, etc.) Your decision? First, eliminate the deposit insurance limit, everything is covered. Second, support them in exchange for guarantees that they will be accepted at 100% of their value (even if they were worth less). But beware, these two decisions are very dangerous, because the message of the future is: if the banks are doing badly, the government is there to save them regardless of all Alternatives? At least explore the option of someone buying the bank even for a token $1 (that’s how SVB’s branch in England was sold). Guilty? In addition to bad monetary policy, bad administration that did not diversify assets, bad decisions by depositors (some had to lose at least part of their funds), bad regulation.

Could something similar happen in Ecuador? I don’t think so. Strength: Ecuadorian banks have much more liquidity than most, some of it is in International Reserves, the same reserves that some wanted to take over (see my article last week) … a barbarism better forgotten. (OR)