Unexpectedly, the global financial markets are reeling from a series of shocks prompted by the US Silicon Valley Bank’s (SVB) collapse about two weeks ago. Worried that the SVB could be the first domino to fall, I urged the Central Bank of Curaçao and Sint Maarten (CBCS), on 13 March 2023, on my social media account to say something. Inconceivably, CBCS has so far preferred to stay in its cocoon.
A few days ago, the Minister of Finance sent a letter to the CBCS for more information. It’s beyond me why a letter was sent, and why this was published instead of a face-to-face meeting with the CBCS. If the CBCS had reacted quickly, it could have controlled the narrative instead of a political actor.
I digress. My fear became a reality. SVB was the first domino to fall, followed by Signature Bank, and the First Republic Bank. Crédit Suisse (CS) was forced to accept US$ billions to stay afloat in Europe. Some, including me, fear it could be a repeat of the collapse of Lehman Brothers in 2008, which led to a sharp contraction of the world economy in 2009.
The clear indicator of unrest is a sharp decline in oil prices despite strong efforts from US Fed and the Swiss National Bank to calm the situation. Just two days before the fall of SVB, the West Texas Intermediate (WTI) price, one of the leading global oil benchmarks, was over US $80 per barrel. After the shocks caused by SVB and CS, the WTI price fell by nearly US $15 per barrel.
The critical question is whether the situation was now better or worse than in 2008, which led to a sharp contraction of the world economy in 2009. This time bank failures are happening on both sides of the Atlantic. Also, the combined size of SVB and CS is US $750 billion, more significant than Lehman Brothers’ US $620 billion. Will the Federal Reserve contain this possible meltdown with a change in its monetary policies? In that case, what are the consequences for our country?
There are two causes of bank failure – inadequate capital and inadequate liquidity. Inadequate capital arises from bad loans or bad investments as was the case with CS and Lehman Brothers (2008). Inadequate liquidity is caused by rapid withdrawals of deposits.
SVB belongs to the inadequate liquidity category. SVB had approximately $200 billion in deposits and was overexposed to interest rate risks. This bank was not cautious, but greedy, and the greed overruled sound banking practice. To be fair, there were specific problems at SVB and Credit Suisse before the meltdown, as banks tried to balance inflation with financial stability. According to the Social Science Research Network, 186 US banks are vulnerable to a rapid liquidity drain like the SVB.
How vulnerable is our financial network? Why is the CBCS allowing its silence on this critical issue to potentially become a political sideshow? I hope the people at the CBCS realize that the genie is out of the bottle and that they have to say something.
Alex D. Rosaria was Minister of Economic Affairs, State Secretary of Finance and Member of Parliament. He is currently a member of the US think tanks Global Americans and Caribbean Policy Concern, as well as a freelancer in Asia and the Pacific.
