Original source (on modern site)
The takeover of one of the largest global banks (Credit Suisse) by its even larger Swiss rival (UBS) marked a febrile weekend in financial markets. It was accompanied by the US Federal Reserve working in concert with other major central banks across the world to enhance the provision of liquidity to the banking system through so-called dollar swap arrangements.
The Credit Suisse crisis came on top of two smaller US banks collapsing (Silicon Valley Bank and Signature Bank) and another one (First Republic) requiring major co-ordinated support from other lenders. In the UK, the subsidiary of SVB was taken over in an orderly way by HSBC following the financial problems of its US parent.
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The obvious question is: does this feel like a replay of the 2007/08 Great Financial Crisis?
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The short answer is no - this time it is different. In 2007/08 the crisis was triggered by a common cause, which was the mis-pricing of risk by major financial institutions which started with US sub-prime mortgages and which spread like a virus across the financial system. The issue was much more systemic. Banks are also better capitalised now, and there is better regulatory oversight.
The current banking problems have different causes: in SVB's case it was poor asset-liability management, exposed by rising interest rates. The Credit Suisse saga is a sorry tale of decline in the last few years, with a repeated inability to re-focus a loss-making bank: it made an $8 billion loss in 2022, and had little prospect of returning to profitability soon. On top of that it had to admit in its annual report in March that there were "material weaknesses" in its internal controls related to financial reporting.
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Of course, whenever banks run into trouble there are always common traits: clients lose faith in the ailing bank and ultimately major deposit withdrawals may trigger a crisis and resolution by the regulator and central bank, or a rescue by another bank. Poor management also often lies at the heart of a bank failure. But that is the only similarity with 2008. The problems in 2023 in the banks hit so far feel very different.
So how concerned should we be about current events? As noted above, banks are better capitalised than in 2007/08. But there are also real dilemmas facing policymakers now which were not there in 2008.
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First, central banks are having to increase interest rates to cope with a major inflationary shock, initially started by the Covid supply-chain lockdowns and subsequently supercharged by the invasion of Ukraine. Central banks now face the unenviable task of setting a course for interest rates which they know will create fissures and strains in a financial system which has become used to many years of low interest rates and quantitative easing. The European Central Bank continued to tighten monetary policy last week, but it recognises the need to maintain financial stability in its policy strategy.
Second, as the UBS takeover of Credit Suisse demonstrates, there is some uncertainty on how these crises will be resolved by regulators. The Swiss authorities penalised some Credit Suisse bondholders (specifically the $17bn losses imposed on its additional tier 1 contingent convertible bonds, or cocos) whilst its shareholders were not wiped out in the UBS takeover. The European Union authorities and other regulators commented that this would not have been their approach. Again, this creates uncertainty in financial markets at precisely the wrong time.
Finally, the new UBS entity, although it may yet reduce in size as it disposes of parts of the existing Credit Suisse organisation, is very large compared to the economy of its home nation. There are real questions about how much Global Systemically Important Banks (G-SIBs) should be allowed to grow. There were 30 banks listed as G-SIBs in 2022 by the Financial Stability Board (FSB), in consultation with the Basel Committee on Banking Supervision (BCBS) and national authorities. These included Credit Suisse and UBS.
Hence, whilst we might not see a replay of 2007-08, nerves will continue to be tested in financial markets in weeks and months to come, at least until interest rates peak. Whilst 2023 looks and feels different from 15 years ago, it will be of little comfort if any more banks fail.
Professor Sir Anton Muscatelli, principal and vice-chancellor, University of Glasgow
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