A week can be a long time in financial markets and it is clear that the banking tremors which started in the US with the collapse of Silicon Valley Bank are now being felt in Europe. Swiss authorities scrambled over the weekend to complete a rescue plan for Credit Suisse, while bank shares across the EU have fallen sharply. This is not a re-run of 2008, but serious questions still lie ahead for bankers, regulators and governments.
Credit Suisse was always at risk of being in the firing line if nervousness again hit banking markets – its investment banking arm has been hit with a series of scandals and it was in the midst of a major restructuring.
Still, the large flow of deposits out of the Swiss institution late last week was sobering. It meant that the funding guarantee given by the Swiss central bank during the week had not calmed nerves, necessitating the move, agreed yesterday, for Credit Suisse to be taken over by the other big Swiss bank, UBS.
Credit Suisse faced particular problems. But the big write-down on its market value reflected in the merger terms is striking and will be noted in markets. Regulators and governments tell us that Europe’s banks are well-capitalised and have sufficient financial buffers. The ECB promised last week that it would provide any funding supports that might be needed, while underlining its belief that Europe’s banks are sound.
Ireland’s banks, tightly regulated since the financial crash and with limited loan exposure to riskier areas such as commercial property, may not be in the eye of the storm, as they were in 2008. But their share prices have been hit, too and a planned sale of a further part of the State stake in AIB may be delayed.
This will all take some time to play out. There are a few areas to watch. One is whether any other EU bank faces a run of depositor’s cash. Was Credit Suisse a once-off or are their problems elsewhere? Notably, a full euro-zone -wide deposit insurance scheme is not yet in place, even if individual countries have their own schemes.
The second is whether rapidly rising interest rates lead to any other strains in the financial system. Normally higher interest rates favour banks, but we have seen over the past week how they can also create problems. And the third issue is whether a downturn in the euro zone economy starts to lead to a rise in bad debts
Banking regulators put in place a raft of new rules after the financial crash. In the case of the US, the fact that these only applied in full to the biggest banks left smaller lenders more exposed. In the EU, banking regulation is now overseen from Frankfurt. After years of a slow stabilisation of the banking sector following the financial crash, just how solid the new regime is may now be put to the test.
