Science strengthened banks. How long will stability last?

Wall-to-Lead Bank Collapse in the US During the 2010 Financial Crisis: The Case of Silicon Valley Bank, New York City Bank, and Credit Suisse

In 2010, the system of banking regulations known asBasel III was adopted. “These rules reflect a very different model of regulation,” Haldane notes, “in which bigger, more connected banks are forced to hold bigger buffers of regulatory capital.” The Basel III agreement, he says, also identified a list of systemically important banks. These are the kinds of super-networked banks that Haldane and May had identified in their study as having more damaging effects if they fail. Regulators decided they needed to hold more capital. Haldane says the new rules capture a lot of the basic insight of the ecology and banking paper.

Researchers are not ruling out further closures or other effects. They warn governments against relaxing the regulations they put in place after more than 400 banks collapsed in the US alone during the global financial crisis. The warnings are based on the long-standing relationship between researchers and central bankers.

Silicon Valley Bank (SVB), based in Santa Clara, California which mainly lent money to technology start-up companies, saw its deposits withdraw US$42 billion in March. 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. A week after that, regulatory agencies in Switzerland approved a takeover of Credit Suisse by its rival bank UBS, both based in Zurich, Switzerland.

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. These bonds have lost value as interest rates have gone up. US banks had more than $620 billion of lost assets due to rising interest rates, according to one estimate.

Stephan Bales and Hans- Peter Burghof, both banking students at the University of Hohenheim, Germany, published a study on 6 April which claims that the collapse of SVB was influenced by frenetic social media activity. The researchers looked at the data that was available during the days when the board called for more capital. The most intense period ofTwitter activity was when the stock price of the bank was collapsing.

So far, however, these incidents have not caused contagion. This doesn’t mean it couldn’t happen, researchers say, but central banks and regulatory authorities have a better grip on the banking system as a whole than they did in 2008.

Putting the Most Important Things on a Website: How the US and UK Banks are Trying to Solve the Dodd-Frank Act

The measure was inspired by the PageRank algorithm that Sergey Brin and Larry Page developed to rank websites by importance, with the most important of sites having the most links. The idea of most systemically important banks being those that have the strongest connections with other systemically important banks was captured by DebtRank.

The Dodd–Frank Act of 2010 established US rules, which were weakened by Donald Trump. The European Union and the UK government are looking into doing the exact same thing. 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. The implication is that more risks could be taken to boost the economy. The mini- crisis that this year has was the counterpoint to the reasoning explained by Haldane.

Having a mini crisis, like the one we have so far, is not something that is helpful. It may help to sensitize and remind the financial markets and financial-market players to the risks inherent in banking.”

In 2006, the Federal Reserve Bank of New York and the US National Academies of Sciences, Engineering, and Medicine organized a conference to bring these two groups together in the spirit of problem-solving. Robert May was a former adviser to the UK’s government on scientific issues and is 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.