ALEX BRUMMER: Banking turmoil not over

A quiet complacency has settled over financial markets since the eruptions of last month, which saw the failure of Silicon Valley Bank (SVB), Signature, an emergency merger for Credit Suisse with UBS and a dangerous loss of confidence in Deutsche Bank.

Those who have lived through previous banking crises will recognise there is often a calm before the next storm.

Over a year passed between the collapse of Northern Rock in 2007 and Lehman Brothers, but beneath the surface the tectonic plates in global finance were shifting as exotic financial products, built on low-grade, sliced-and-diced sub-prime mortgages, were shown to be without value.

Trouble ahead? Those who have lived through previous banking crises will recognise there is often a calm before the next storm

The present disruption to banking and credit markets is of a different nature.

After a decade and a half of super low interest rates and money printing, a surge in global inflation required a sharp U-turn by central banks. 

The potential to bring existing financial structures tumbling down was demonstrated in the UK by the liability-driven investments (LDIs) which exposed a weakness in Bank of England policing.

The scale of the rescue, which has taken place to the financial system this time because of glaring holes in regulation and audit blunders, largely has gone unrecognised. 

In spite of pledges that taxpayers’ money would never again been put at risk, the International Monetary Fund reveals in its financial stability report that the Federal Reserve has already shelved out $400billion to the banking system to keep it liquid.

This is in addition to the cost of bailing-out SVB’s ten largest creditors with deposits of $13billion, including established tech names such as streaming pioneer Roku and online gaming outfit Roblox.

Federal deposit insurance was designed to save smaller businesses and individuals, not digital titans. 

The IMF is by no means confident that the upheaval seen so far is the end of matters. It describes confidence in the financial system as fragile and fears fractures seen so far could be a ‘harbinger’ of worse to come.  

In particular it is concerned there are mismatches between the liabilities (loans made) and the liquidity of assets (immediate cash) in the banking system.

In the same way that LDIs exposed a lacuna in the pensions system, the high level of leverage by non-banks in private equity and property is a huge potential exposure. The failure of Richard Branson’s admittedly esoteric special purpose acquisition vehicle (SPAC) Virgin Orbit is case in point.

What is as alarming is that for all the high-flown rhetoric about regulators being on top of the situation, they are essentially firefighting. 

As was the case during the great financial crisis, it is taking vast assistance by the US, Swiss and other authorities to build barriers to hold back a wave of failures. So far so good. But forest fires have a nasty habit of spreading wildly.

Wrong choice

The CBI has been true to its word and lost no time in concluding its probe into the conduct of director-general Tony Danker, and terminated him without compensation.

That does set a good precedent for boardroom Britain where corporate leaders often leave in disgrace with big cheques. 

Payments for failure are bad enough but pay-outs for when conduct falls below expectations are unforgivable.

Whether the CBI’s decision would hold up in a legal challenge is a matter of speculation. 

The choice of what is in effect an internal candidate, economist Rain Newton-Smith, who was at the CBI for nine years before a brief stint at Barclays, is expedient.

One should not forget, however, that entirely separate charges of sex, drugs and rock and roll, including an alleged rape at a boat party, took place when Carolyn Fairbairn, now a Dame, was in the hot seat. She says she dealt with complaints robustly.

What the CBI really need at this point is a high profile business person capable of schmoozing the dissidents. Speed in choosing a successor may have been the order of the day but steady as it goes is not an answer.

PR offer

You are never quite sure whether having KKR as an investor is a good or bad thing.

Nevertheless, the expansion of FGS, better known in the City as Finsbury, places a potential value on the communications outfit of $1.5billion and portends an eventual initial public offering. 

Founder-chairman Roland Rudd needs to ensure that at the very least there is a dual listing. After all, this is a firm with distinct UK roots.

This post first appeared on Dailymail.co.uk