Global banking has been in turmoil over the past two weeks following a series of stunning bank collapses in Europe and the United States.
Despite a series of bailouts for troubled lenders and the assurances of governments and financial regulators, concerns about the health of the global financial system persist in the wake of the March 10 collapse of Silicon Valley Bank (SVB).
Even as economists warn against comparisons to the bank failures that sparked the 2007-2008 financial crisis, investors are skittish amid speculation that other financial institutions could soon be in trouble.
What is behind the ongoing unrest in the banking sector?
While US regulators hoped to bolster confidence by guaranteeing deposits at SVB and crypto-focused Signature Bank earlier this month, the collapse of Credit Suisse over the weekend reignited contagion fears in the financial sector.
Unlike SVB, a medium-sized bank, Credit Suisse is a financial behemoth — large enough to be one of 30 banks considered systemically important to the global economy.
The Zurich-based bank had approximately $1.1 trillion in assets in 2021, according to S&P Global, making it the 45th largest lender in the world. By comparison, SVB, the 16th largest bank in the US, had about $209 billion in assets last year.
While Credit Suisse has been dogged for years by concerns about its financial health following a series of scandals, Sunday’s sale of the bank to UBS has dealt a blow to Switzerland’s image as a safe haven of financial stability and has led to volatility on the financial markets.
While some bank stocks rose following news of the deal on Monday, major lenders including HSBC and Standard Chartered saw their share prices fall. On Tuesday, Asian stocks gained some ground in a sign of easing jitters, with the MSCI’s broadest index of Asia-Pacific stocks outside of Japan rising 0.4 percent.
First Republic, one of a number of regional US banks under pressure in recent days, saw its share price fall nearly 50 percent amid fears the San Francisco-based lender could require a second bailout just days after $30 billion lifeline from America’s largest bank. banks, including JPMorgan Chase, Bank of America and Wells Fargo.
Despite the intention being to quell the market panic, the nature of the Credit Suisse acquisition has also created some turmoil.
Under the bailout, Swiss authorities reduced the value of 16 billion Swiss francs ($17 billion) worth of bonds to zero, while allowing shareholders to keep about 3 billion francs ($3.2 billion) of their investment.
That decision upended the longstanding debt recovery norm that shareholders, not bondholders, should suffer the biggest losses – much to the outrage of those who lost all their investments.
Some bondholders have argued that the move violates the law and have threatened legal action.
Iris Chiu, a professor of business law and financial regulation at University College London, said banks may be more vulnerable to “information contamination” and market panic following post-2008 reforms that put shareholders at risk for losses to spare taxpayers.
“This means that if a weak link is exposed, investors become paranoid about finding other weak links to sell assets or claim liabilities,” Chiu told Al Jazeera.
“I think a lot of that has to do with the increase in bail-inable debt that banks have issued to strengthen their capital positions. sensitive in times of uncertainty. Unfortunately, bail-in can also exacerbate the perception of a banking crisis and subsequently lead to self-fulfilling prophecies regarding the banking crisis.”
Credit Suisse’s merger with UBS, Switzerland’s largest bank, has also raised concerns about the proliferation of more institutions deemed “too big to fail”.
Thorsten Beck, director of the Florence School of Banking and Finance, described the acquisition as a “terrible idea, creating an even bigger institution that is too big to fail”.
“But it shows once again that all talk of pre-crisis bail-in is quickly forgotten as things go south,” Beck told Al Jazeera.
What can be done to stop the panic?
After several bank rescues, there are indications that the authorities are planning further actions to boost confidence.
In the US, financial regulators are considering temporarily guaranteeing all bank deposits, which are currently protected down to just $250,000, Bloomberg News reported Monday.
Regulators announced similar steps to guarantee all deposits with SVB and Signature after those lenders ran into trouble earlier this month.
Extending protection to all deposits would raise questions about moral hazard, the situation where an investor or depositor is induced to take greater risks in the knowledge that he or she will not incur losses.
“I do think that the SVB will force a reconsideration of the regulatory framework. Clearly, the treatment of uninsured deposits is an important part of the problem,” David Skeel, a professor of corporate law at the University of Pennsylvania Law School, told Al Jazeera.
“They are at legal risk, but banking regulators almost always rescue them, dating back to the 1984 bankruptcy of Continental Illinois. This situation reminds me of the ‘constructive ambiguity’ over whether major banks would be bailed out in 2008, which turned out to be disastrous. are. Expectations but no certainty of a rescue plan often turns out badly. It seems to me that regulators should develop clear guidelines about which depositors will and will not be protected.”
In the longer term, Democrats, including US President Joe Biden, have pointed to the need to tighten oversight of banks, including by restoring key provisions of Dodd-Frank reforms passed under former President Donald Trump’s administration. reversed.
Among the changes that Democrats are pursuing, likely to meet resistance from Republicans, is the restoration of the $50 billion threshold for “too big to fail” banks subject to stress tests designed to assess whether they be able to weather a severe economic downturn.
Are we perhaps on the verge of a collapse of the global banking system?
Most economists consider that unlikely, although unrest at more financial institutions is possible.
Not only have the authorities taken swift action to contain the consequences, financial regulations have also tightened considerably since the last global financial crisis.
Compared to, say, 2007-2008, banks need to have much more capital on hand to withstand a severe recession.
“The global banking system is not about to collapse,” Beck said. “What we see: when the tide goes down, we see who has been swimming naked. Credit Suisse is no surprise – given previous troubles – as are several medium-sized banks in the US. Could other European banks be affected? Yes, possibly, but this would not be the same as a collapse. Overall, the banking system is significantly stronger than in 2008 and authorities are much better prepared to address issues at an early stage.”
“The consequences of the bankruptcy of the SVB are more persistent and widespread than I expected,” said Skeel. “I expected it to blow over quickly given the peculiarities of the SVB, and of course that has not been the case. But I still don’t think it will cause a major banking crisis.”