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On the verge of a new banking crisis?

Joost Haddinga

Why Credit Suisse and Silicon Valley Bank are not the new Lehman Brothers

Over the course of two weeks the financial world has seen major upheavals in both the US and Europe. The downfall of first Silicon Valley Bank and Signature Bank in the US was followed by fear and a loss of confidence of investors. Lights were shed on troubled banks elsewhere, with Credit Suisse emerging as the victim of choice. Now that it has been acquired, will markets calm down or are other shock waves to be expected?

Maybe Keynes was right in the end with his remark about animal spirits. Humans are not necessarily guided by rationality and a loss of confidence can lead to major troubles in markets once it influences too many people. And if that happens, all models that pre-empt bank runs from happening or save the financial sector under the assumption of rationality are suddenly obsolete and quite different problems arise. While the fall of Silicon Valley Bank (SVB) was definitely a case of missing regulation, misguided investment and the banks unpreparedness for changing economic circumstances, the fall of credit Suisse falls more into the realm of fear, worry and discontent.

As a renowned Swiss bank operating since the mid-19th century, Credit Suisse has been deemed a systemically important global bank which had to comply with stricter capital regulation since the financial crisis. With ongoing restructurings, unsuccessful investment banking activities and internal problems, it faced losses for the past years and was partially acquired by investors from Saudi Arabia. These struggles and losses were known, with the bank’s market capitalization declining and its reputation damaged. And now it all cumulated when extra attendance was given to distressed banks after the events in the US. Then everything happened fairly quickly: investors from Saudi-Arabia said they would not recapitalise the bank, the Swiss National Bank issued a loan and a statement guaranteeing Credit Suisse’s compliance with the going regulations, while a bank run was continuing. Then, on March 17 after exchanges closed, the Swiss government announced that over the weekend a deal would be struck with UBS to acquire Credit Suisse – and so it happened for around CHF 3 bn. Depositors received a full bailout while shareholders were at least left with parts – and especially holders of Additional Tier 1 capital being erased. All this involved sudden changes of Swiss law, emergency meetings of the government and immense pressure on the involved banks – just to pass this deal and pre-empt further earthquakes in the financial sectors. During this time stock exchanges also saw declines with people expecting all this to have wider repercussions.

But this is most likely not to be: the current events involved no global players that had been engaged in unsustainable activities around the globe and involved the whole banking system. SVB’s problems came with the regulatory exemptions granted by successful lobbying (primarily by SVB’s CEO) for small- and medium-sized US banks. And the dissolution of Credit Suisse came from year-long mismanagement and inability to deal with the lessons of the financial crisis. Therefore, both are locally concentrated incidents which have nothing to do with the patterns we observed during the financial crisis. We do not see a housing market breaking down or the whole banking world being invested in too complex and non-transparent MBS. We are facing interest rate hikes, we are seeing rocking inflation and also shifting geopolitical patterns and conflicts, but this is nothing financial markets are entirely unprepared for or unable to deal with. 

In the end these events come back to a Schumpeterian creative destruction. Shifting economic patterns lead to those institutions unable to deal with it (or unable to convince investors that they are able to deal with it) being driven out of the market while those prepared survive and evolve stronger. Despite the uproars such bankruptcies do create, they don’t always mean that the whole system is at risk. What remains crucial is that regulators do not mock themselves and the guidelines set by them and follow through with the lessons they learned from the Financial Crisis. Otherwise we might be back at banks failing or market discipline being obsolete if regulators continue to provide ad hoc solutions and hence undermine both simplicity, stability and transparency of the existing rules.