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Another global banking crisis on the horizon?

2023-03-25 19:01:59Biznes SHKRUAR NGA REDAKSIA VOX
Another global banking crisis on the horizon?
Another global banking crisis on the horizon?

The collapse of "Silicon Valley Bank" in the US and the subsequent crisis at "Credit Suisse" caused fears of contagion, but while European governments and financial institutions are closely monitoring the situation, not everything looks bleak.

Earlier this week, European political and financial leaders moved to bolster consumer confidence after the crisis at Credit Suisse, Switzerland's second-largest bank.

The emergency takeover of "Credit Suisse" by its competitor UBS and the difficulties of some smaller American institutions have fueled concerns for banks in the eurozone this week.

European advisers confirmed that in the event of bank failure in the European Union, a fixed rule applies under which shareholders and other creditors are called. Bank losses would initially be borne by share capital. If this is insufficient, subordinated bonds, the so-called AT1 capital, are called up.

In the case of Credit Suisse, the holders of these equity-like bonds will lose their invested money in full during the course of the takeover by UBS. For these AT1 bonds, the loss amounts to 16 billion Swiss francs (16.2 billion euros). Credit Suisse shareholders will also lose a large portion of their invested money, but will receive UBS securities.

The president of the European Central Bank (ECB) Christine Lagarde remains optimistic that there would be no spread of the event in the financial system of the eurozone.

"The European banking sector was resilient thanks to strong capital and liquidity positions," said Lagarde.

"In the face of current market tensions, the ECB was ready to support the financial system with liquidity if necessary and maintain the normal functioning of monetary policy," she added.

Last week, the ECB raised its key interest rate by 50 basis points despite the turmoil. In view of the current high level of uncertainty, the central bank did not commit to the future. Lagarde made it clear that the monetary guardians will be guided by economic data.

However, within Europe, politicians and central bankers are at odds over the effectiveness of the ECB's recent interest rate decisions.

ECB interest rate policy under scrutiny in Italy

Italian Economy Minister Giancarlo Giorgetti said on Monday that he believed the impact of the Credit Suisse crisis on Italy's banking system would be "insignificant".

Referring to the market turbulence associated with Credit Suisse and before that, the collapse of Silicon Valley Bank (SVB), he said he believed the markets had calmed down a bit.

"I think the situation in Europe is under control. We are in constant contact with the regulatory authorities and we are calm about the Italian banking system", he added.

Milan's stock market fell 2.6% in early trading on Monday, with bank shares taking a fresh hit after more than a week of turmoil in international money markets.

The rescue of "Credit Suisse" had not managed to dispel investors' worries. On Tuesday, the Milan stock market closed 2.53% higher as banking stocks rallied from recent losses in SVB and Credit Suisse.

Giorgetti also reiterated his criticism of the ECB's policy of raising interest rates to combat high levels of inflation.

"[Policy] needs to be calibrated very carefully because raising interest rates can be useful to control inflation, but it can also cause problems for financial stability," he said.

The ECB's decision to increase the basic interest rate by 50 points leaves the Italian government unhappy.

"The ECB is not moving in the right direction, even if today it started a rethink. In our opinion, it is not a good way to deal with inflation," said Foreign Minister Antonio Tajani.

Basel III rules saved France

European banks were in "extremely solid" shape and their situation was not similar to that of some US lenders, François Villeroy de Galhau, governor of the Bank of France and a member of the ECB's governing council, said last week between fear of a crisis in the sector.

"European banks are not in the same situation as some American banks for a very simple reason, which is that they are not subject to the same rules," he added.

The rules known as Basel III that were created after the 2008 financial crisis to ensure banks had sufficient capital and liquidity had been "effective", Villeroy de Galhau said. He added that 400 European banking groups were subject to Basel III requirements, compared to just 13 in the US.

Under former US President Donald Trump, small and medium-sized US banks were exempted from Basel rules in 2019, he said, noting that both SVB and Signature Bank, which collapsed last week, were Among them.

The governor of the French central bank explained that "Credit Suisse" was a special case. "It is a bank that has difficulties in its business model" as well as "failures in its internal control system," he said.

While the ECB said it was ready to provide liquidity to guarantee the stability of the eurozone's financial system, it stood by its strong interest rate hike of half a percentage point to tame inflation, despite fears that rising borrowing costs could add further stress on banks. .

Villeroy de Galhau said the ECB's move sent a "strong" sign of confidence in its anti-inflation strategy and the resilience of European and French banks.

Slovenia, Bulgaria and Germany seem calm

On Monday, the Bank of Slovenia said the European and Slovenian banking systems were operating robustly, despite turmoil in the US and Swiss banking systems.

"The euro area banking sector is resilient, with strong capital and liquidity positions," added the Slovenian Central Bank.

Interim Bulgarian Minister of Finance, Rozita Velkova, commented that at this point there is no risk of contagion for Bulgaria from bank failures in the US.

Senior financial analyst at MoitePari.bg Desislava Nikolova noted that the ECB's interest rate hike, which began in 2022, had not affected the banking market in Bulgaria due to its strong liquidity.

"The country had sufficient resources to slow down the processes related to the increase in interest rates," she said.

Not being part of the eurozone, Bulgaria has kept the lowest lending and deposit interest rates, Nikolova said. She expects that instead of a gradual increase in interest rates, Bulgaria may now see a faster increase, because in macroeconomic terms, recent developments have caused uncertainty.

On Monday, German Chancellor Olaf Scholz welcomed the "decisive action of the Swiss authorities" in taking over Credit Suisse's USB, a government spokesman said. European authorities had learned from the 2008 financial crisis and tightened banking regulations, he stressed. "The German banking system is thus well positioned," the spokesman added.

End of ECB interest rate hikes still under consideration

According to the president of the German Bundesbank, Joachim Nagel, who is part of the ECB's Monetary Policy Council, the ECB has not yet reached the end of the interest rate hike course.

At the same time, he said in an interview with the Financial Times, interest rates were approaching the cap. Economists consider this to be the level at which interest rates begin to slow economic activity.

Nagel stressed that the ECB would have to resist calls for early interest rate cuts after the interest rate peak had been reached. Otherwise, he said, high inflation risks rekindling.

"Our fight against inflation is not over," said the head of the German central bank.


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