The end of the ‘everything bubble’ has finally hit the banking system.

 Credit Suisse and SVB might be just the first of many shocks.

 The immediate cause is the rapid increase in official interest rates in the U.S. and other major global economies. 

The true cause is the unwinding of an economic and financial structure built upon an artificially low cost of money, which gave rise to the “everything bubble” and its leveraged speculation.

There are several other areas of concern.

First, over recent years, investment has flowed into venture capital and early/ late stage start-ups. The driver was that abundant capital was itself a strategy. Many unprofitable start-ups require near-continuous investment. 

The problem is that new inflows into private equity have declined by around two-thirds from the 2021 level of around $600 billion as a result of large losses. 

While some of these companis have sufficient funds to continue operations, many will be forced to close. 

Second, since the global financial crisis in 2008, regulatory restrictions on traditional banks have shifted higher risk or more complex lending or trading into the shadow banking system — non-bank financial institutions including insurance companies, pension funds, mutual funds, hedge funds, family offices and specialty financiers

Satyajit Das MarketWatch 20 March 2023

By boosting asset prices, policy makers aimed to buttress elevated debt levels and, via the wealth effect, increase confidence, consumption and investment. 

Satyajit Das, Bloomberg 3 januari 2018

Banks Need to Worry About Shadow Banks

Shadow banks controlled $225 trillion at the end of 2020, or nearly half of all global financial assets

Paul J. Davies Bloomberg 17 november 2022


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