The first shock is digested. What lessons are supervisors, politicians and banks drawing from the recent turbulence in the USA and Switzerland? Not all questions have been answered.
Supervisors and politicians reacted quickly and decisively to the latest problems in the banking sector. Were the risks of the rapid turnaround in interest rates in the USA and underestimated in the euro area? In the USA, the turbulence is now being dealt with politically: After a hearing in the Senate Banking Committee on Tuesday, representatives of the US Federal Reserve and the US deposit insurance company FDIC, among others, have to answer questions from MPs in the US House of Representatives on Wednesday.
What has happened so far?
The quake began in early March with US banks that had previously been relatively unknown to the general public: Within a few days, California’s Silicon Valley Bank (SVB) lost the confidence of investors and customers, and on March 10 the US deposit insurance company FDIC took over took control and closed the institute specializing in start-up financing. In the meantime, the American First Citizens Bank has taken over assets from the collapsed institution in the form of deposits and loans. Other small money houses in the USA stumbled, the Signature Bank collapsed completely. Share prices of banks worldwide came under pressure, the previously ailing Swiss bank Credit Suisse was rescued in mid-March by means of an emergency sale to UBS.
Has a global banking crisis been averted?
“The risks in the financial system are still very high,” said the head of the EU Banking Authority (EBA), José Manuel Campa, in an interview with “Handelsblatt” earlier this week. “In addition, rising interest rates are weighing on the financial markets. Such a drastic turnaround in interest rates not only increases the earnings opportunities for banks, but also the risks.” However, he was “relatively satisfied with the state in which the banks are in the EU are on average,” said Campa: “The average equity and liquidity ratios are high.”
The German Council of Economic Experts believes that there is a major banking crisis as a result of the turbulence in the USA and in the United States Switzerland currently unlikely. “We would like to state that we see no threat to the stability of the financial markets at the moment,” emphasized “Wirtschaftsweise” Ulrike Malmendier when presenting the most recent economic forecast by the Federal Government’s advisory body on March 22nd. The situation is different than in the financial crisis of 2008. The market between banks works well, the supply of credit for companies and consumers is secured.
The chief bank supervisor of the financial supervisory authority Bafin, Raimund Röseler, said he was very relaxed with regard to the German banking market: “Of course we have problems with some German banks, but we have no problem with the banking sector,” said Röseler. He “honestly doesn’t see the danger of a systemic crisis or that what happened there would develop into a systemic crisis here.”
How safe are the deposits of savers?
In mid-March, Chancellor Olaf Scholz put it simply: “The deposits of German savers are secure.” But according to a recent Forsa survey commissioned by “Stern”, only 50 percent trust this assurance. With 46 percent, almost as many Germans have doubts about it. The fact is: In every member state of the European Union (EU), national deposit insurance systems guarantee that up to 100,000 euros per customer are secured per bank. In addition to this legal protection, almost all financial institutions in Germany also protect savings deposits. The deposit protection fund of the Association of German Banks (BdB) applies to private banks. According to the association, at least a deposit of at least EUR 750,000 per customer is currently protected per bank. At many institutes, the security limits are significantly higher. There are comparable regulations for savings banks and cooperative banks.
How are the central banks reacting?
The problems in the financial sector come at a bad time for central banks as they stand in the way of their fight against high inflation. However, both the US Federal Reserve and the European Central Bank (ECB) point out that they can tackle inflation and banking problems separately. In concrete terms: Interest rate hikes should help against high inflation, while the banks receive sufficient funds.
Not all experts share this point of view: The central banks have to realize that monetary policy and financial stability cannot be completely separated, says Erik Nielsen, chief adviser to the major bank Unicredit and once their chief economist. It is not for nothing that the rapid and sharp rise in key interest rates is considered to be an important reason for the financial problems of many US banks. Nielsen even goes so far as to demand a joint declaration from the major central banks that they will not raise interest rates for the time being.
What are the economic consequences of the crisis?
The concrete consequences are not yet entirely foreseeable. However, many experts warn of negative effects: “While the immediate crisis in the banking sector seems to be easing, it remains to be seen to what extent the turbulence will damage economic confidence,” explains the British analysis company Capital Economics. The greatest risk is that the banks will reduce their lending. This would dampen investment and consumption and ultimately harm the economy.
(From Jorn Benderdpa and Bernhard Funkdpa-AFX)
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