Banks that need more capital: Why do banks need more? The most recent failure of Silicon Valley Bank, headquartered in Santa Clara, California, is due to frenetic social media activity
The regulations for banking known as Basel III were put in place after 2010. Haldane notes that the rules reflect a different model of regulation in which bigger, more connected banks are forced to hold more regulatory capital. He says the agreement identified a list of systemically important banks. The kinds of banks that Haldane and May identified in their study as having damaging effects if they fail. Regulators need to hold more capital. Haldane says the rules capture much of the basic insight of the ecology and banking paper.
Researchers are not ruling out further closures or other effects. The global financial crisis of 2007–2008 caused a number of banks to collapse in the United States alone, and they warn governments not to loosen regulations that were put in place. These warnings are based on work forged through long-standing links between researchers and central bankers — and should be heeded1.
On 10 March, Silicon Valley Bank (SVB), based in Santa Clara, California, which mostly lent money to technology start-up companies, saw depositors withdraw US$42 billion. The California state regulator closed the bank and its UK arm was subsequently absorbed by multinational bank HSBC for £1 (US$1.24). Two days later, New-York-based Signature Bank also closed. The agencies in Switzerland approved the takeover of Credit Suisse by its rival bank, while in the same week it happened.
According to Stefano Battiston, who studies systemic risks in financial networks at the University of Zurich, Switzerland, the roots of SVB’s failure are rapid interest-rate increases that are being seen globally. For several decades, rates have been low and many banks have put money into seemingly safe interest-bearing bonds. But as interest rates have rocketed, these bonds have rapidly lost value. As of the end of the year, US banks had assets that were worth more than $600 billion of losses due to rising interest rates.
The speed of SVB’s collapse was also influenced by frenetic social media activity, according to a study posted on 6 April to the Social Science Research Network preprint repository by Stephan Bales and Hans-Peter Burghof, who both study banking at the University of Hohenheim, Germany. The researchers looked at search data in the days when a group called for more capital. They found that the most intense period of Twitter activity corresponded with the bank’s collapsing stock price on 9 March.3
The failures have been isolated so far, and are not showing any signs of spreading. The difference in understanding of the banking system by the central banks and agencies is one of the reasons for this. Another is that governments have implemented stricter rules, meaning that individual banks are better able to withstand shocks. Research has been key to these developments, with a number of influential studies emerging as a result of contacts made between scientists and central bankers in the early years of this century.
The piece of research by Battiston and his colleagues that was published in 2012 enabled regulators to improve how they monitor individual banks. The team devised a measure called DebtRank. The data used to create an index reflect the risks of the financial system should a particular bank fail.
But in 2018, then US president Donald Trump weakened the US rules, which were first set out in the Dodd–Frank Act of 2010. Now, both the European Union and the UK government are considering doing something similar. The UK government, for example, plans to change the law so that regulators are required to focus not only on maintaining stability, but also on growth and competitiveness. There is an implication that some extra risks can be taken to boost economies. Haldane tells Nature that this year’s mini-crisis stands as the counterpoint to such reasoning.
“In this sense, having a mini crisis or a set of mini casualties — like what we’ve seen so far — is actually not unhelpful. It may help to sensitize and remind the financial markets and financial-market players to the risks inherent in banking.”
In 2006 a conference was held between the Federal Reserve Bank of New York and the US National Academies of Sciences, Engineering, and Medicine. Robert May was a former chief scientific adviser to the UK government and later a legislator in the House of Lords. May and his colleagues wrote about the conference in a Nature News & Views article called ‘Ecology for bankers’4 and started to collaborate with researchers studying finance, and with the United Kingdom’s central bank, the Bank of England.