The world celebrates big, big corporates get much more tax benefits than a person earning an average salary ever could. We celebrate big schools, big colleges, big stores and big factories. Our obsession with size neglects all the energy and collective effort that goes into making the ‘big’.
Labelled a Global Systemically Important Bank, the collapse of Credit Suisse bank sent the entire global financial market into a frenzy. Credit Suisse was founded in 1856 and has since been an important part of Switzerland’s financial network. It remained unfazed in front of the 2008 financial crisis, earning the title ‘too big to fail. Experts now point to a series of problems that were brewing for a long time. With the US bank’s collapse reaching Europe, the bank suffered a sharp decline in confidence, with investors rushing to protect their money. While the bank’s share prices plunged, it lost about 24% of its share value by mid-March.
The markets worldwide fear the ghost of 2007-2008, as we rush to rescue these banks. Finally, Credit Suisse had to be saved. The Swiss government brokered a deal between Credit Suisse and UBS, its rival bank, where the latter agreed to buy Credit Suisse for 3 billion Swiss francs.
Imagine if a big corporate like Google fails tomorrow, should governments across the world come together to save it? Isn’t it better to not let them become so big in the first place? No business becomes ‘Too big to fail’ on its own, they are aided by the state machinery; lax regulations, tax subsidies, concessions, preferential treatment and so on. The same system and policies that enable the formation of a giant institution, can also regulate it. We could change our attitude from ‘this firm is too big to fail, and let’s rescue it’ to ‘this firm is becoming too big, let’s downsize it so that it doesn’t pose a big threat to the whole system.’ This also holds true for the rising tech monopolies across the world, that have begun to rule everyday aspects of our lives, think of Google, Facebook and Amazon. In fact, in 2020, the US congress briefly considered breaking up tech monopolies because their market power was crushing competition, and they were amassing huge data and sky-high profits.
The story of the bank collapse is also the story of ignoring warning signs and deliberately watering-down regulations. By now, we all know the story of Silicon Valley Bank. A favourite among start-ups, venture capitalists and tech companies, the bank got too greedy for profits, made bad investment decisions and collapsed.
Following this, Signature Bank, another regional bank whose clients were mainly lending firms and real estate companies, crashed, as its customers swiftly ran to withdraw their money. First Republic Bank and others also faced the burn of the same. Regulators stepped in to contain the fallout, and avert any further harm to the banking sector. Federal Deposit Insurance Corporation has been appointed to assist these banks while the US president Joe Biden claimed that the banking crisis has calmed down and assured Americans that their deposits are safe. But how did the crash happen?
After the great depression of 1929, the US embraced the Glass-Steagall Act of 1933 which separated traditional banking from investment banking and restricted the use of bank credit for speculative activities. Reversed by the Clinton administration, it served as the background of the 2007-2008 crisis. After the 2007-08 meltdown, the US adopted Dodd-Frank Act in 2010, which advocated tighter regulations on banks with assets of $50 billion or more. This was again diluted by the Trump Administration in 2018, raising the previous threshold to $250 billion. This was at the heart of the Silicon Valley Bank collapse, and the regional banks that followed.
Why are banks allowed to be grown into such big entities that they become ‘too big to fail?’ And their failures become a burden on public money! Is the government hand in glove with the banks to maximise their profits by doing whatever needs to be done? Willing to take risks that jeopardise public money and lead to a worldwide crisis?
Six central banks from the US, the UK, Europe, Canada, Japan and Switzerland came together with a joint statement after the fall of Credit Suisse bank to restore the faith of the public. So are the central banks ready to rescue the private ones from failures, but too afraid to actually regulate them?
In their greed, the big financial institutions are moving away from traditional banking services. Their sole motive is maximizing their profits while serving their rich clients, and this can once again present a bigger risk to the world economy. The way they could play with the hard-earned deposits of the public, investing in risky enterprises and taking reckless decisions hoping to be saved by the government, is fatal for all of us. Would we be better off with smaller banks that serve under better regulations? And whose failures don’t hurt the exchequer so deeply!
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