During the financial crisis 15 years ago, the heads of the major Wall Street banks had to be questioned for hours by the Congressional Finance Committee. The meetings were broadcast live and thus satisfied the cheated taxpayers’ need for information. It was a democratic transparency offensive, the likes of which could hardly be enforced in Germany – against the will of the two mainstream parties – as shown, for example, by the committee of inquiry into Wirecard, which met behind closed doors.
This week, the heads of US regional banks had to publicly comment on the collapse of several financial institutions in March for the first time: the former head of Silicon Valley Bank (SVB), Greg Becker, but also Michael Roffler, who led Bank First Republic. Neither of them showed any remorse: the supervisory authorities, the media, even their own customers: they were all to blame, just not themselves. Becker even justified himself for the fact that he was just about to go bankrupt for $ 3.6 million in shares in the bank has sold. One was “caught in a whirlpool of development,” said Roffler. But what are the causes of the crisis and what are the consequences for Europe? The most important questions and answers:
What happened?
Probably very few people in this country were familiar with the US regional banks that had just triggered the worst banking crisis since the financial crisis of 2008, with consequences reaching as far as Europe: at the end of March, the Swiss Credit Suisse was also affected; the big bank was already ailing and had to be supported by its competitor UBS and government guarantees after the share price plummeted and customers withdrew more and more money. The regional banking crisis began at the beginning of March with the collapse of the Silicon Valley Bank, which was the 16th largest bank in the USA in terms of total assets. At the same time, Silvergate and First Republic were also hit – within five days, US deposit insurance had to close three medium-sized banks and the US government had to issue a guarantee for savings depositors. Shortly thereafter, other regional banks came under scrutiny, investors withdrew money, and share prices plummeted. The situation has calmed down in the past few days. The question is whether this will last.
What are the causes of the crisis?
The trigger is the turnaround in interest rates: Central banks have massively raised interest rates since the beginning of 2022, which has caused the value of government bonds and mortgages with fixed interest rates to fall significantly. Important to know: Banks never have the entire customer deposits in the vault, but invest them in longer-term securities or loans. The Silicon Valley Bank had previously grown massively with its start-up customers and had therefore invested heavily in government bonds. When interest rates rose and at the same time rumors of financial difficulties began to circulate, many start-ups suddenly began withdrawing their money. Faced with the run, the bank was forced to sell the assets at a loss – and as its situation worsened, even more customers became suspicious and withdrew deposits. Once banks start talking, they can hardly stop such a dynamic. Silvergate Bank and Signature Bank, on the other hand, were both heavily invested in cryptocurrencies and failed because of the turmoil in that market. There, too, investors withdrew their money. Another problem is that the US regional banks have granted massive loans for US commercial real estate – prices are falling there, partly because many companies no longer need their offices after Corona. Regional banks hold around 80 percent of these loans on their books, according to investment bank Goldman Sachs. Depending on your definition, there are approximately 30 to 40 regional banks in the United States. Many were founded in the 1980s.
Where was the banking regulator?
After the oath taken after the financial crisis, it is hard to believe that banks would be regulated more strictly in the future: but the US regional banks were operating in a way in the blind spot of supervision. The Trump administration had exempted institutions with a balance sheet volume of up to $250 billion from important liquidity regulations, and they were also spared stress tests. In addition, some financial institutions did not even have a head of risk. In fact, the regional banks had successfully campaigned to spare smaller banks like the SVB: They had a harmless business model and, with strict regulation, could no longer finance companies that create jobs. As a consequence, the Federal Reserve is now considering stricter rules for financial institutions with assets of more than $100 billion. Not only that: In a letter to the SEC, the American Bankers Association also urged state regulators to ban speculation on falling bank share prices.
Are there winners from the crisis?
The beneficiaries of the crisis are probably the big US banks, which received some of the money from depositors, above all the banking giant JP Morgan under the leadership of CEO Jamie Dimon. He recently took over the First Republic. In the short term, this was a cheap solution for US deposit insurance. In the medium term, however, the strategy could take revenge. JP Morgan, while considered well run, is already a huge bank. If it failed, the consequences would be devastating.
Does the crisis have consequences for Europe?
In order to prevent the banking crisis from spreading, the Federal Reserve initially also issued a deposit guarantee for the Silicon Valley Bank and the Signature Bank. State-regulated deposit insurance only protects deposits up to $250,000 at other banks, which is why many customers continued to withdraw money. As a lesson learned from the recent banking turmoil in the US, Luis de Guindos, Vice President of the European Central Bank, is now pushing for cross-border protection of bank customers’ funds in Europe. “The crisis in the US regional banks has shaken us up: we have seen how market sentiment can change abruptly,” de Guindos told the Italian daily Il Sole 24 Ore. Although the situation in Europe is different, it has been shown that social networks, for example, can contribute to a rapid rush to financial institutions. Therefore, a common European deposit insurance (short: Edis) is “absolutely necessary,” said de Guindos. “An incomplete banking union could end up being one of the biggest vulnerabilities we have. In fact, I would say that the lack of Edis is the biggest vulnerability for the European banking system.”
A common European deposit insurance (Edis) should prevent bank runs, especially in countries with weak financial strength. So far, however, there have only been national pots for deposit insurance, which have been required by law since 2015, not European ones. In the opinion of the Edis supporters, this is not enough – but the federal government is against it.