Is a global financial crisis imminent?
Are the recent banking problems at Silicon Valley Bank (SVB) and Credit Suisse just the tip of the iceberg, or will all this tension wash away in the coming months?
Credit Suisse is in crisis
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If we start with the argument that this crisis will not become widespread, The first point to note is that, while it might be easy to say in hindsight, there are question marks about financial management at SVB while Credit Suisse’s difficulties have long been clear as reflected, for instance, in the decline in its share price. Hence, it could be argued that the "crisis" is really specific to these banks and that others are unlikely to undergo a similar fate.
Another argument in SVB’s case is that it fits below the USD 250 billion asset threshold, which classifies it as systemic and so subject to more regulatory scrutiny. In other words, this might only be a small-bank problem, not a big-bank problem. On this theme, bank capital levels for the big, systemically important banks are far higher than during the 2008 crisis—some four times higher, in fact.
Besides, we also have another argument that, since the 2008 global financial crisis, the Fed and other major central banks have introduced a whole raft of measures that banks can use to access liquidity quickly, and, of course, they are quick to introduce new measures, as the Fed has done with the Term Bank Funding Programme.
In addition to this, it might be argued that liquidity levels in general are still quite ample due to quantitative easing, even if central banks have started to change course. And while this change in course has also come with sharp interest rate increases, the optimists could argue that these have been well telegraphed by policymakers, which should have given banks and other financial institutions the time to adjust their activities accordingly.
In other words, it has not been a shock like the pandemic. Another argument on the same theme is that we have seen a number of adverse shocks in recent years, such as the pandemic and the war in Ukraine, and yet, throughout, the banks and the financial system have proved quite robust. This could be a sign that tensions will not turn into a full-blown crisis.
So, what about the arguments on the other side—those that suggest a big banking crisis has just begun? In Mr. Steve Barrow, Head of Standard Bank G10 Strategy’s view, as we would expect, most of these arguments in opposition were talked about earlier. For instance, we might question management at the banks that have struggled so far, but it is always going to be the weak that fold first.
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Other, less obvious, bad management practices might reveal themselves in the future and strike down more banks. There’s also the argument that even if "bad" banks start the crisis, it can still extend to ‘good’ banks if funding strains really escalate, as we saw in the global financial crisis. We can also point out that while large, systemically important banks are far more sound than they were 15 years ago, the risks are different now. Instead, it is the shadow banking sector that is the most vulnerable, even though this crisis originated among mainstream banks. The big banks have better capital, but regulators' knowledge of the non-banks is more opaque, and there could be significant vulnerabilities here.
To this point, the rise in interest rates, although telegraphed by central banks, could still have wrong-footed the non-bank sector in a big way with assets, such as bonds deeply underwater and other assets that are not marked-to-market, making them even more distressed. The argument that QE has provided a highly liquid banking environment can be challenged by the fact that we have seen some strains in recent years forcing the Fed, for instance, to recalibrate just how much it can reduce its balance sheet. This would suggest that conditions are not as liquid as we might imagine.
"We do lean more toward the view that a deep banking or financial crisis is unlikely, but, as we can see, there’s some powerful arguments on the other side as well", said Mr. Steve Barrow.