March 23, 2023

As discussed in the last few BlackSummit commentaries, the collapse of several banks over the last couple of weeks has rocked financial markets and created a crisis of confidence not only in the US financial system but also in the global financial system. This week, we investigate the financial conditions that led to the bank failures. We are also taking a closer look at the alignment of Beijing and Moscow and how the alliance impacts Washington’s next moves. Meanwhile, climate experts are desperately trying to get the world’s attention with a “final warning” about the world’s climate crisis. Finally, the Saudis are performing a balancing act that will have serious repercussions for the region and its relationships with world powers.

Today’s Banking Crisis

Today’s Banking Crisis

What’s wrong with the banks

The Economist

The 11 Days of Turmoil That Brought Down Four Banks And Left a Fifth Teetering

Steve Dickson, Bloomberg

Low Rates Were Meant to Last. Without Them, Finance Is In for a Rough Ride.

Jeanna Smialek, The New York Times

Rising interest rates have left banks exposed to unrealized losses, with investors revisiting the question of bank fragility. Post-2009, the long period of low interest rates and low inflation, left few considering how the world could change if inflation and interest rates rose. The turn proved lethal for Silicon Valley Bank (SVB), which had loaded up on long-term bonds when interest rates were low and asset prices were high. When bond prices plunged as interest rates were hiked, SVB was left exposed to its long treasury position, which ultimately led to huge losses and the bank’s demise. While the Fed has stepped in to make loans secured against the banks’ bonds, the question of moral hazard has once again arisen, as the possibility that bankers will engage in risky investing in anticipation of future Fed backstops might be priced in. As a result, new regulations need to be put in place, such as requirements for small and midsized banks, with total assets of $10.5 trillion, requiring the same liquidity and accounting rules as megabanks, in addition to greater buffers in the system, such as stress tests on a bank’s safety cushion were its bond portfolios marked to market and if rates rose further.

In the meantime, five banks have already failed: Silvergate Capital Corps, SVB, Signature Bank, Credit Suisse, and First Republic Bank. The context of each bank’s collapse was unique. Silvergate failed, for example, as it held the bag during the FTX and Alameda Research collapse, resulting in a bank run. SVB losses were in long-term treasuries, which likewise spooked depositors to withdraw. Signature Bank suffered a class bank run as well, as withdrawals surged by 20% on news of the Silvergate and SVB collapses. Credit Suisse was rocked by multiple scandals and billions of losses. Finally, First Republic Bank likewise suffered a bank run. While Silvergate is to be liquidated, the other banks are either in talks to be acquired, such as SVB; have been acquired, such as Signature Bank and Credit Suisse; or are being floated with liquidity injections from other banks, such as First Republic. With inflation and rates both still high, the Fed’s task is a complex one indeed. What else might break moving forwards as the Fed continues to slow demand in the economy? Can the Fed pivot, while reigning in inflation? Time will tell.

Russia-China Alignment

Why China and Russia Are Closer Than Ever

Nicole Hong, The New York Times

If China Arms Russia, the U.S. Should Kill China’s Aircraft Industry

Richard Aboulafia, Foreign Policy

Chinese President Xi Jinping met with Russian President Vladimir Putin in Moscow this week. The occasion comes more than a year since Russia’s invasion of Ukraine began, and the visit is the most high-profile visit to Russia since before Covid-19. Beijing has claimed that Chinese-Russian relations are at a high point due to their shared interest in curbing American power. The two have strengthened economic and military ties over the past year as well. The White House believes that China is considering sending weapons to Russia for its war in Ukraine.

This geopolitical alignment begs the question: what should the US do if China does supply Russia for its illegal invasion of Ukraine? China is the only country with enough stockpiles and industry to replace Russia’s losses. Some analysts have put forward the idea of crippling the Chinese aircraft industry in retaliation. Air transport is very important to the Chinese economy, and many of Beijing’s commercial transports are dependent on imported Western technology. The potential loss of a key market may be enough to convince China to stay out of the war in Ukraine.

A Final Warning

A Final Warning

Scientists deliver ‘final warning’ on climate crisis: act now or it’s too late

Fiona Harvey, The Guardian

Climate Change Is Speeding Toward Catastrophe. The Next Decade Is Crucial, U.N. Panel Says.

Brad Plumer, The New York Times

A panel of the world’s leading climate scientists has concluded that humanity has nearly reached its deadline to combat climate change before catastrophe. Countless regions of the world have already experienced the effects of climate change, from heatwaves, droughts, and floods, to the loss of ecosystems. Nearly 3 billion people are highly vulnerable to the severe effects of climate change, and even more will be endangered if carbon emissions are not slashed. Scientists have put forward 1.5 degrees Celsius as the height the world can rise to in temperature above pre-industrial levels before the climate damage become irreversible – the world is currently 1.1 degrees above pre-industrial levels, and current climate change initiatives won’t work fast enough.

There is cause for optimism, however: it is still possible to avoid the 1.5 degrees Celsius mark, but only if countries act now. The panel reports that governments and companies worldwide would have to at least triple their ~$600 billion yearly spending on clean energy initiatives to halt the change. It would be no small task and would require a global rewiring of the world’s energy industry. The world’s fate is now squarely in humanity’s hands. 

Saudi-Iranian Rapprochement

Saudi rapprochement with Iran is an exercise in buying time

Kim Ghattas, Financial Times

China casts itself as Middle East peacemaker with global ambition

Kathrin Hille, Financial Times

Saudi Arabia and Iran recently announced the reestablishment of diplomatic relations with one another under Chinese mediation, signaling growing Chinese influence in the region and Saudi pragmatism in managing competing regional and global interests. While Saudi Arabia continues to maintain strong ties with the United States, as seen for instance with the recent $37 billion Boeing deal, Chinese influence is growing, exemplified in the recent China-Gulf Cooperation Council meeting, with China’s rising influence perceived as a challenge to US authority in the region. The Saudis, then, are engaging in a pragmatic balancing act, not just globally between the US and China, but regionally as well. For instance, Saudi Arabia began the process of talks with Iran at the same time as it began diplomatic normalization with Israel. In addition, Saudi Arabia recently sent an official to visit both Ukraine and Russia. Ultimately, Saudi balancing will be put through the ringer as geopolitical interests both regionally and globally collide.