Banking authorities on both sides of the Pond are receiving plaudits for learning from the 2007-09 great financial crisis.
Instead of allowing troubled institutions to go bankrupt – as was the case when Lehman Brothers went down in September 2008 – they have acted to prop them up by arranging bear hug mergers from more solid rivals, and by making it easier for banks in the US to swap loss-making assets for cash from the Federal Reserve.
Such measures are intended to limit the unseen shock waves pulsating through global banking as investment funds, other banks and ordinary savers seek safer havens.
Rescue: In Switzerland, the Swiss National Bank, having failed to stabilise Credit Suisse with big infusions of cash, ultimately decided the only solution was a merger with its rival UBS
That does fly in the face of some of the steps taken by the Financial Stability Board, which was established after the meltdown of 15 years ago.
Its rules, adopted by national regulators, were designed to prevent the same thing happening all over again, placing taxpayers’ money at risk.
Among the much talked of reforms was that no bank should be ‘too big to fail’. Endless debates took place about creating so called ‘living wills’, so that when the next significant bank found itself flailing, it could be run down in an orderly manner without upsetting the apple cart.
Moreover, if anything went wrong, it would mainly be shareholders in the line of fire.
None of this seems to have happened. Instead, central banks have engaged in frantic weekend efforts to prop up flailing institutions rather than see equity holders and bosses pay a heavy price.
In Switzerland, the Swiss National Bank, having failed to stabilise Credit Suisse with big infusions of cash, ultimately decided the only solution was a merger with its rival UBS.
In the end, it could prove to be a big payday for UBS, although it can never be sure of what it is buying until it has been under the bonnet.
Similar takeovers were orchestrated in 2008 when Lloyds acquired HBOS and JP Morgan in the US first bought Bear Stearns and later Washington Mutual.
Technically, such supported deals – and others being orchestrated for Signature and First Republic in the US – preclude the need to invoke living wills.
But that is not the complete picture. In America, the agreement by Treasury Secretary Janet Yellen and Jay Powell at the Fed to offer to swap underwater assets for cash is effectively a bailout.
The Fed may be independent, but its money belongs to taxpayers. The same can be said for the Swiss National Bank’s initial response to Credit Suisse’s problems.
A huge oddity is the treatment of what are technically called Additional Tier 1 (AT1) or Coco bonds created after the financial crisis to bridge capital shortages.
Such bonds have offered better returns than traditional securities so have been attractive to fund managers.
The theory was that in the case of trouble, such bonds would be converted into equity, creating a better capital cushion.
That hasn’t happened in Zurich. Under the UBS rescue of Credit Suisse, existing shareholders will get hugely devalued shares in the enlarged institution and the £14billion or so of Cocos, or additional tier bonds, are wiped out.
This has caused consternation at the European Central Bank and anger among Coco investors, who are threatening legal action. It led the Bank of England to point out that this form of instrument ranks behind core-equity.
The way the UBS bailout has been structured has added a whole new area of risk to the financial system. Instead of co-ordinated, predictable actions by regulators, it has been a case of national interest first.
Sparring partners
How quickly things change. In a recent conversation, John Lewis chairman Sharon White sounded confident that in spite of last year’s loss, the department store and supermarket group was sitting on £1.5billion of liquidity and had all the resources to do what it wants.
It had signed a £500million deal with Abrdn to build homes on store sites in Bromley and Ealing, and there was not even a hint that mutuality might end.
Before rushing into anything, White should remember the horrors that struck building societies which sacrificed mutuality, the meltdown at the Co-op Bank and the humiliation at LV when it sought to sell itself to private equity.
There may be a halfway house by, for instance, unlocking pension fund money. But the partners need to be careful what they wish for.
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