The writer is an FT contributing editorThe famous quantum mechanics thought experiment posits that if a cat is sealed in a box with a deadly substance, you can’t know whether it is still alive until you open said box. In the meantime, it is simultaneously alive and dead. And so it is with banking today: we can’t know if the past week was a series of idiosyncratic, containable issues or the start of a 2008-style banking crisis. At the moment it is both.
Investors and depositors must not only believe that banks have good capital ratios, ample access to liquidity and behave responsibly, but also that the supervisory and regulatory architecture put in place after 2008 to save the system works. In the short term, there can be gradations of confidence in all of this. But when we finally look in the box, investors must either trust all of these things or none. It is a binary outcome: the cat can’t be a little bit dead.
Reason points to the recent banking instability being a series of containable issues, mostly based on supervisory and management issues. Silicon Valley Bank, Silvergate Bank and Signature Bank were unusually exposed to interest rate risk through both their clientele (itself a phenomenon of a low-rate environment) and their assets (long-term bonds that had to be sold at a huge loss to redeem deposits). First Republic, with a wealthy depositor base that might largely be uninsured, has also been caught up in concerns about liquidity. Credit Suisse, in trouble many times before for a litany of reasons, is now dealing with both confidence and liquidity concerns.