Status: 03/17/2023 3:06 p.m
Crisis meetings, liquidity injections, stock market turbulence: the critical situation in the banking sector is forcing supervisory authorities and central banks to take protective measures. Will the crisis be contained?
The bad news from the banking industry is currently following one another in quick succession. In the past week, the Silicon Valley Bank (SVB) in the USA was closed after heavy outflows of funds and taken over by the US deposit insurance. It is the largest US bank failure since 2008. The New York Signature Bank was also placed under state control by the supervisors.
More banks in trouble
Yesterday finally followed a joint rescue operation by eleven major US banks, including JP Morgan, Citigroup and Goldman Sachs, which gave the troubled regional bank First Republic Bank a capital injection of $30 billion to prevent worse things from happening.
In Europe, the Swiss bank Credit Suisse, a heavyweight in the industry, got into trouble. However, experts do not see a connection to the situation in the USA: “The company has been struggling with home-grown problems for years and is now suffering from the change in mood, without any direct connection to developments in the USA,” comments Daniel Schär, market observer at Weberbank.
Is there a crisis of confidence?
The banking business, as is often underlined, depends to a large extent on trust: on the one hand, trust between banks, which are linked in many ways through the most diverse business relationships and can thus tear each other down; on the other hand, however, also from the confidence of the customers that their deposits are secure and that they can do business with them without any worries. This trust has recently faltered, at least slightly.
“Today is different”
Nevertheless, a lot of optimism can be heard when economists, market observers and analysts comment on the current situation in the banking sector. Above all, experts attach importance to clearly distinguishing the acute situation from the financial crisis of 2008.
For example, economist Veronika Grimm does not expect a financial crisis 2.0 despite the problems surrounding the Silicon Valley Bank and Credit Suisse. “I don’t think we are in a similar situation to 2008,” said the member of the German Council of Economic Experts Deutschlandfunk. At the time, the financial crisis was based on the poor creditworthiness of financial products, which were also not transparent. “It’s different today. There’s greater transparency,” emphasizes Grimm.
The chairwoman of the council of experts, Monika Schnitzer, jumps in: “A financial crisis 2.0 is not to be expected from this collapse alone,” said Schnitzer. “So far, there is nothing to suggest that other banks will be negatively affected.” Schnitzer knows that the German banking system is much better protected against such crises than the SVB was thanks to much more stringent regulatory provisions.
“The insoles are safe”
Even Chancellor Olaf Scholz spoke up in the “Handelsblatt”. He does not see a new financial crisis looming in Germany and Europe: “The monetary system is no longer as fragile as it was before the financial crisis,” agrees Scholz. Legislators and banking regulators have learned their lessons from the Lehman bankruptcy. “The deposits of German savers are safe.”
This was reminiscent, at least from afar, of the spectacular appearance of his predecessor, Angela Merkel, who, together with Finance Minister Peer Steinbrück, guaranteed citizens’ private savings in October 2008. However, we are still a long way from a situation that would require such a commitment.
No domino effect to be expected?
In his comment, Weberbank expert Schär summarizes the arguments that, according to experts, speak against spreading to other institutions and renewed instability of the financial system: The bankruptcy of the Silicon Valley Bank is not the result of bad loans, rather the special customer structure of the SVB has the development favored. Furthermore, the regulations for the major US banks and European banks are much stricter than, for example, for the SVB.
According to Schär, the systemically important banks also have a significantly better equity base than in 2008. The expert at Weberbank recently praised the fact that the supervisory authorities, the US Federal Reserve and the US government reacted immediately and would take immediate action in the event of further problems.
Edgar Walk, chief economist at Metzler Asset Management, also emphasizes with a view to Europe that European banks would hold large amounts of liquidity with the ECB, which they could use in the event of an outflow of deposits. “The ECB also has enough tools to provide European banks with additional liquidity should it become necessary,” Walk said. “It is therefore very unlikely that a European bank will run into liquidity problems and therefore have to realize losses on financial investments like the Silicon Valley Bank,” concludes the economist.
“Contained For Now”
Nevertheless, politicians, central banks and supervisory authorities feel compelled to actively promote confidence, so to speak. “In the last few days, the Fed has granted new loans with a volume of around $300 billion to cover the increased liquidity needs of the banking system,” writes Commerzbank economist Bernd Weidensteiner in a recent analysis Republic Bank seems like the problems have been contained for the time being, the expert said.
Weidensteiner further notes that major US banks have seen a strong inflow of deposits in recent days. Apparently, customers would have withdrawn funds from smaller institutions and parked them at the big banks. “In the event of any crises, the tendency to transfer deposits to the largest banks, which are considered particularly safe, was also observed beforehand,” says Weidensteiner. Is this the next problem if more small banks lose their deposits?
Banking issue has lost some of its explosiveness
According to Jochen Stanzl, chief market analyst at CMC Markets, the small and medium-sized banks in the US have now overcome their liquidity crisis for the time being. “The breakwater from the official side initially prevents a further erosion of confidence in the financial sector,” writes Stanzl – using the word “first” twice.
Portfolio manager Thomas Altmann from asset manager QC Partners notes that the banking issue has lost some of its explosiveness. But it’s not gone. The fact that explosiveness can return should not be forgotten.
The interest rates, which are still rising, could continue to put banks under pressure: “If losses continue to accumulate due to bad loans, they reduce the equity ratios of the institutes, which have already reached almost zero at some small banks,” said Stanzl will keep the financial markets busy for a while.”