Troubled banks, crimson stock markets: There has been unrest in the financial world for two weeks. What began with the bankruptcy of Silicon Valley Bank ended this weekend with the multibillion-dollar takeover of ailing Swiss bank Credit Suisse.
It raises questions that have hardly been asked out loud since the 2007 and 2008 banking crises. Finally, the deepest recession since the 1930s began in 2007, when several retail banks and mortgage institutions went bankrupt. The bankruptcy of the American investment bank Lehman Brothers also triggered a shock wave in the financial world and ultimately a deep economic crisis. However, the situation is very different from then.
From where?
The biggest difference from then is the regulations: They have become much more stringent for banks. Large banks are now under the direct supervision of the European Central Bank and must meet stringent risk requirements and maintain much higher buffers in case something goes wrong.
Account holders in the eurozone are also guaranteed protection of their bank accounts up to €100,000. National banks vouch for each other and the ultimate goal is to create a single European banking union where all banks in the eurozone vouch for each other.
In addition, there is a “resolution mechanism”: a scenario that supervisors can use when a bank is about to go bankrupt. It was decided that the bank’s shareholders and bondholders should bear the losses first, not the taxpayer.
other reasons
No two crises are alike, and that goes for the turmoil we’re seeing around banks right now.
The 2007 banking crisis began in the USA. Banks sold mortgages to people who could barely afford it. As the housing market crashed and homeowners handed over their keys one by one, these “junk mortgages” turned out to be resold, packaged and found on the balance sheets of investors and banks around the world as risk-free products.
Now the riots in America have started again, but for a completely different reason. The Silicon Valley Bank has suffered from the sharp rise in interest rates along with the weakening tech sector. It turned out that the bank not only had a highly disproportionate client base of high-risk ventures, but also a disproportionate investment in long-term, fixed-rate loans. The value of these investments suddenly fell sharply as interest rates rose.
Want to learn more about the Silicon Valley Bank and the challenges facing the tech industry? Our correspondent in California explains it this way in the video:
US regulators were unaware of the risks in Silicon Valley Bank because the bank was viewed as a “small bank” that didn’t need to be bailed out if things went wrong. Therefore, the bank did not have to comply with the stricter regulations for large banks.
It wasn’t until it became clear that authorities decided to take over Silicon Valley Bank and continue to guarantee the funds that numerous tech companies would risk going bankrupt if they lost access to their cash.
Credit Suisse is also a special case. The bank has been battling corruption scandals and huge losses at the hands of some dubious big clients for years. There was talk of a small bank run at the end of last year. Confidence was eroded last week when it emerged that the Swiss bank had still not streamlined its risk management, and the main shareholder, the Saudi National Bank, announced that it would not provide additional support to the bank. Customers withdraw about 10 billion euros per day.
Can the restlessness pass?
In her meeting with the European Parliament, ECB President Christine Lagarde once again expressed her confidence in the soundness of the European banking system. Some mocking the American regulators: “All banks (more stringent, editor’s note) are subject to Basel III regulation, some banks are not.”
He also drew attention to the difference in the supervision of EU banks and Swiss banks. “Our rules are not enforced by other institutions, especially Swiss authorities,” he said. “Switzerland does not set the standard in Europe.”
But he also stated that the loss of the second largest bank in Switzerland would not be without consequences. The ECB is monitoring the situation closely.
Source: NOS
Roy Brown is a renowned economist and author at The Nation View. He has a deep understanding of the global economy and its intricacies. He writes about a wide range of economic topics, including monetary policy, fiscal policy, international trade, and labor markets.
