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A view of the Credit Suisse UK offices in Canary Wharf, London. Alamy Stock Photo
Global banking crisis?

Global banking crisis déjà vu: How worried should we be?

‘Why should we think that this will not happen with other banks?’ one economist said, referring to the failure of Credit Suisse.

TROUBLE IN AMERICA, talks of “contagion”, and news stories about the strength of Europe’s banking system may be giving some people a bad case of déjà vu this week.

While the current uncertainty facing the global banking sector may carry unwelcome hallmarks of the storm that precipitated the crash in 2008, economists are in agreement that we are in a different, but still concerning, position today. 

The degree to which we should be worried, however, is not something that everyone agrees on.

As the dust settles from UBS’s takeover of Credit Suisse (the Swiss bank that faced collapse over the weekend), and the collapse of Silicon Valley Bank before that (a mid-sized US bank whose customers were mainly tech startups), stock markets, investors, and regular people are watching to see what happens next. 

The collapse in 2008 came with whiplash-inducing abruptness. Fifteen years on, and after major changes have been made to how commercial and investor banks are regulated all over the world, surely banking systems could not unravel so suddenly today – right? 

No mystery

Trinity College Dublin Professor of Finance Brian Lucey is pretty confident that what we are seeing is independent banking failures, that Ireland’s banking system is not facing major risks, and that overall, what’s going on isn’t that mysterious. 

“With Credit Suisse, that was a case of a bank having been badly managed, and it has now been taken over by a better bank, there’s no mysterious issue there. 

“If you think about it as though it was Supervalu taking over Centra, that wouldn’t cause us to worry here in Ireland, it’s sort of like that.”

Lucey said that what happened with the mid-sized US banks that have collapsed was not related to the risks that Credit Suisse faced. 

“The underlying issue for the Swiss bank was that as central banks raised interest rates to fight inflation, the bonds the bank held, which would have included government and corporate bonds, would have decreased in value, leaving the bank with unrealised losses that then materialised. 

“With SVB and Signature Bank, those were cases of poor risk management practices,” Lucey said.  New York-based Signature Bank, mainly a commercial lender which had increasing investments in cryptocurrencies in recent years, failed 48 hours after SVB. 

While these bank failures have placed the global financial system under additional strain at a time when it is trying to combat inflation rates, Lucey said that the main difference between now and 2008 is that regulators have learned a lot of lessons. 

“They have a better toolkit to combat any potential crisis before it happens, and they seem a lot more willing to use it as well from the intervention we’ve seen. 

“There is no need for panic. What people should absolutely not do is listen to self-appointed Facebook and Twitter experts, because at the heart of the matter here is confidence. 

“If people do not have confidence in the banks they can create a crisis where none exists through runs on the banks. What the average person really needs to worry about is increasing interest rates, and how they will impact access to finance,” Lucey said. 

“What we are seeing now may be reminiscent of 2008, but the strains facing banks now are different to those they faced around the time of the crash. Banks are companies, some will have better management and risk management than others, and banks do fail, but if the system is able to absorb those failures, it doesn’t lead to total collapse. 

”Of course, if the entire system has been gorging itself, that is a very different situation, and that’s what happened in 2008. If a crisis comes now it will be a banking crisis, and it will be very different to the crash,” Lucey said. 

‘Slow-rolling crisis’

Other economic experts and figures within the financial sector have also spoken of a “slow-rolling crisis” due to a tightening of monetary policy, including Larry Fink, the head of the Blackrock US investment group. 

Others have spoken of their confidence in banking systems in the UK and Ireland, including Lord Turner Ecchinswell, who was the head of the UK’s financial regulator during the crash, and Patrick Honohan, the Former Governor of the Central Bank of Ireland. 

Speaking on RTE Radio’s News at One programme earlier today, Honohan recognised the impact of the bank failures in terms of rising interest rates, but said that otherwise the Irish banking system will be “largely unaffected”. 

Good reason to be ‘quite worried’

Dr Lucia Morales is an academic innovator and researcher in the School of Accounting and Finance at Technological University Dublin who has also worked extensively in the banking sector. 

She has a different outlook, and thinks that we have good reasons to be “quite worried” in Ireland. 

Morales said that though the collapse of SVB and Credit Suisse had different causes, they are part of the same global financial system, and combined the failures have created significant instability. 

“Once you shake the financial system and you start seeing signs of worries from investors and customers, you have a situation that can unravel quickly. If we think back to the collapse of Lehman Brothers in 2008, that was a subprime mortgages crisis, then when that instability transferred over to Europe, banks here faced a more complex crisis, it wasn’t just a replication of what happened in the states,” she explained. 

What about increased regulations? 

“People might say we have learned lessons since the crash. We have and we haven’t.

“One lesson that has clearly been learned is that of swift intervention. A key distinction between now and what happened in 2008 is that capitals are already flowing to prevent a panic in the markets, but that raises another question, should we be doing this?

“Initially with SVB there was talk of not bailing out the bank because of the level of risk associated with tech startups, then quickly we saw this change, and that’s because the Federal Reserve had to stabilise the market to prevent a run on the banks, and a potential banking system freeze,” Morales said. 

She added that ideally, if regulators were on top of the situation, they would not have had to bail out SVB.

“That will lead to a further increase in inflation, and more strain on normal people’s lives. This presents a problem in terms of which institutions we deem as deserving of protection, and which we say are operating in a way that is too risky. 

“Otherwise, we are back to 2008, where a lot of money was injected into the system, banks didn’t use it for what it was supposed to be used for, they took a high level of risk, and then the central banks bailed them out,” Morales said. 

The TU Dublin lecturer also said that there is a distinct possibility that other banks will face the same situation as Credit Suisse. 

“Why should we think that this will not happen with other banks? Regulations are supposed to be in place to prevent banks from engaging in operations that lead to that kind of outcome, so people could start questioning, is my bank safe enough, they might have unrealised losses too, and that could spell trouble. 

“At the same time, if you completely control what banks do, then you will stifle innovation and financial growth, so it is a balancing act. Right now it is a waiting game until we get more information from the regulators,” she said. 

Morales said that, with mortgage rates that are already higher than the rest of Europe, Ireland is set to feel the impact of increased interest rates harshly. 

“The slowdown in the tech sector is especially worrying here. There is a question about how exposed the Irish banking system is to that slow down, because we have a lot of dependency on big tech firms. 

“We already have difficulties in terms of accessing finance, and in terms of housing, we also have a market without sufficient supply. You are going to see problems for SME’s and entrepreneurs in the tech sector as well. So rising interest rates are a bit of a ticking time bomb  as well. 

“There are reasons to be worried, and to watch closely, but not to panic,” Morales added. 

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