Shaky banks prompt fears stricter rules weren’t enough

Shaky banks prompt fears stricter rules weren’t enough
Опубликовано: Wednesday, 22 March 2023 04:54

But this is not a full-blown crisis, says European diplomat.


They said this shouldn’t happen.

Global authorities spent over a decade reforming the banking sector after the taxpayer-funded bailouts of the 2008 financial crisis. Tougher rules forced banks to hold much higher reserves and keep more cash on hand, and shifted them away from being reliant on public money in a collapse. No lender is now supposed to be “too big to fail.”

And yet.

The last few days have told a different story, from the failure of Silicon Valley Bank to the collapse of Credit Suisse.

“If you look at the numbers, it’s a small problem for planet banking; if you look at the consequence, it’s tremendous,” said Thierry Philipponnat, chief economist of Finance Watch, an NGO, on the collapse of SVB. “What does that tell us? The market doesn’t think that the rules that have been put in place are sufficient to cope with banking instability.”

The chaos of the last week seems to be abating in Europe, for now. But the panic shows just how quickly confidence can evaporate in the face of a bank run, as well as how central banks’ interest-rate hikes could create losses that spread across the financial system.

And that’s a big problem: Markets have, after all, brought down governments before. Their latest banking scalp, Credit Suisse, was performing better than the regulations required — yet still hemorrhaged deposits as investors sold off its shares and debt.

Public money

“Markets did not trust,” said Sebastian Mack, policy fellow for European financial markets at Jacques Delors Centre, a Berlin-based think tank.

With public money back on the line, despite years of reforms to prevent taxpayers being on the hook in a crisis, confidence in the rulebook is now further in doubt.

“What is clear is that at the end of the day, the American and even the Swiss authorities have used public money,” said Jonás Fernández, a Spanish MEP for the Socialists & Democrats.

While governments haven’t been injecting cash directly, they are providing guarantees to steady the ship, and that messes with the basic premise of the post-crisis rules — that lenders should be able to fail in an orderly manner without drawing on the public purse.

“Even small banks have become too big to fail. It’s quite amazing,” said Finance Watch’s Philipponnat. “And it’s almost a bit depressing after 12 years of discussions on ‘How do you make sure that doesn’t happen again?’ and it seems to be back to square one.”

Swiss authorities over the weekend hastily engineered a rapid takeover of Credit Suisse by its local rival UBS to prevent further turmoil | Ming Yeung/Getty Images

Gone after 167 years

It’s been a classic case of how weaknesses in one part of the financial system can infect another in seemingly unrelated ways. The failure of the U.S.’s Silicon Valley Bank, brought down by struggling tech companies and rising interest rates, triggered markets panic over the health of the banking sector as depositors rushed to get their cash back.

That fear spread rapidly to Europe, despite the protestations from politicians that everything was just fine. The contagion brought down the 167-year-old Credit Suisse. In scenes eerily reminiscent of 2008, Swiss authorities over the weekend hastily engineered a rapid takeover of Credit Suisse by its local rival UBS to prevent further turmoil.

Still, the authorities are not throwing public funds around as willy-nilly as in the bailouts of 2008.

“I have seen other bank crises. This is not a full-blown crisis where governments are saving their own banks at any cost,” said one EU diplomat, speaking on condition of anonymity because of the sensitivity of the issue.

And despite the market panic, no one is really talking about ripping up and starting again. Instead, the weaknesses exposed in the banking system are likely to give the whip hand to those who want to get tougher and apply the rules more faithfully.

EU watchdogs on Monday reasserted that the bloc’s regime for failing banks hasn’t changed, to try to calm investor fears over a Swiss decision to reorder who bears losses in the collapse of Credit Suisse.

And Brussels is also now under more pressure to bring forward a plan to close loopholes in the regime for failing mid-size banks.

“The European Commission must present this proposal as soon as possible,” said Fernández.

The EU has been on the cusp of watering down the final set of global bank standards introduced in its wake despite frequent warnings from watchdogs and for Fernández, who is leading negotiations on the reforms for the European Parliament, the bloc may now need to get stricter with smaller lenders and bring in tough requirements for banks’ crypto exposures — because tech bank SVB shows what can happen otherwise.

Mack said the EU’s softer approach now needs a rethink, with less deviations and possibly tougher rules for sovereign bonds.

“The system is fragile, and we should therefore transpose the internationally agreed standards, to not make us vulnerable,” he said.

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