by Antony Abell, CEO and co-founder of TPX Property Exchanges Group
The recent failure of Silicon Valley Bank and Signature Bank has highlighted the significant challenges facing banks. Principle among these, and not readily apparent to most, are the forces of macro and long cycle economics.
Many banks and financial institutions use government bonds (or Treasury Bills) as assets on their balance sheets, previously considered relatively ‘risk free’ for investors. However, the hyperinflation, which has taken root in many economies, is precipitating a decrease in fiat currency’s purchasing power, the liquidity of such instruments and an increasingly harder look at real value.
Long-term bond yields adjusted for monetary Inflation have been severely discounted and in turn, their liquidity has decreased. The reality of SVB and Signature Bank’s inability to maintain their cash reserve requirements are not the result of malpractice or poor management, but rather the underlying value of their bonds. It seems this is likely the root cause of both bank’s demise.
SVBs ‘Run on the Bank’ timeline…
At a macro level, the SVB and Signature Bank sagas are starting to show the limitations of government controlled money creation and distribution. Government issued bonds and their yields are ultimately covered by public taxation. The issue of them are most often political choices with taxpayer consequences. The consequences of these choices are the accelerating loss of the value of our fiat currencies (money) and a depreciation of the value of the stored labour in our pensions.
Economic history teaches us that there are alternatives. Looking back into our economic past, we can re-discover the solutions needed for our future and build for this.
Economic cycles come and go. Arguably, the fiat/debt based economic cycle that we are in is now reaching the end of what has been a long run. However, like so many before it, these cycles end in a series of ‘bank runs’ and varying degrees of upheaval.
As the 16th largest bank in the USA, SVB is a warning to other banks and of disruption to our financial and economic systems unless we shift to a better, more trusted, intrinsic value financial system. When money itself fails to hold real value, history has taught us that populations move to the most trusted intrinsic value asset that has liquidity and common use. Go back far enough and this was seashells, and for a few millennia gold and, more recently, the US dollar. All had their limitations and costs. What is next?
Arguably a new asset-based economic model for what is next can be derived from the digital asset economy (recent AUM peak of $50bn in March 2022) that has already started to be deployed globally around us. It is taking trusted assets such as property, alongside unique and verifiable items such as famous artworks, and turning these into liquid and transferable digital assets that move more quickly and efficiently than traditional banking systems and with lower risk while retaining real world value.
These digital, intrinsic value, assets function not only as a more efficient form for transferring value, but as a form of inflation resistant money itself (when the assets are formed in trusted systems). These are not the ‘asset backed instruments’ or ‘securities’ of old but are in fact legal titles of property managed in open and transparent systems that are open to the local adjudication of courts. These intrinsic value digital assets are increasingly being used directly as money itself, aided by the liquidity of automated market makers and uni-swaps and operate without a plethora of intermediaries.
Venezuela, Zimbabwe and Lebanon are all examples of failed financial systems. All have adopted degrees of barter economies as their ‘fiat money’ failed to hold value or trust.
Knowledge is power and we have an opportunity to build better.
Exigent requirements and the awareness of the systemic and endemic weaknesses of our current economic and financial systems have now been exposed by SVB and Signature Bank and this may shortly force banks, central banks, governments and financial systems to adopt new thinking, new technologies and new models.
There are good arguments to look toward building a more durable asset based, digital, economic emulation of our real value economic past than using the same tools for the same outcomes for the current bank runs.