Silicon Valley Bank, Signature Bank, First Republican Bank – hardly anyone would have expected that these three American regional banks would trigger the next financial crisis. Even though the major Swiss bank Credit Suisse has become an international heavyweight, the financial crisis once again has its roots in the USA. It is still too early for a final analysis of the background and global consequences. But some myths can already be dispelled.
A first, particularly frequently used myth boils down to the fact that every regulation costs business. Banks with fewer regulations and lax supervision, it is said, can operate more profitably and are more competitive. The current crisis proves the opposite: In the USA, deposits are sometimes being transferred at record speed from the less intensively supervised regional banks to the industry giants that did not enjoy the supposed benefits of regulatory simplifications during President Donald Trump’s term in office. Linked to this myth is the assertion that European regulators should match their American counterparts and, through softer regulation,
increase the competitiveness of banks. The fact is: In times of great uncertainty, European banks benefit from the fact that the question of further hidden risks and the resulting additional write-downs is much less urgent than in the case of US regional banks.
The risk of a bank run
A second myth is that deposits are “sticky” and available to banks long enough because of the “inertia” of their depositors. The cases of the American regional banks and Credit Suisse show that this is not the case, especially in today’s times.
Unlike in previous crises, deposits can be transferred from one bank to another in a matter of seconds at the touch of a digital button. In addition, the risk of a bank run is all the greater if a significant proportion of the deposits are not insured due to their size and the deposits come from like-minded groups, such as the start-up scene, as is the case with Silicon Valley Bank.
The third myth claims that the “too big to fail” principle is a thing of the past. The emergency rescue by Credit Suisse proves the opposite. Worse still: In this case, the order of liability that was expected on all sides was not observed. Legal disputes that have already been announced are likely to drag on for years. The unrest in the bond market forced European authorities to clarify the sequence of liability outside of Switzerland. A lot of trust in a systemically important financial segment has already been lost here.
A fourth myth is that markets are always right. If, for example, the costs for credit default insurance went up, there must be something wrong with a bank.
This is often the case, but the efficiency of markets depends to a large extent on their liquidity. If, in the case of Deutsche Bank, which differs positively from Credit Suisse in all relevant key figures, stakes in the single-digit millions are enough to trigger a price tremor, regulators are asked to take a closer look at the efficiency of the markets. That doesn’t mean banning short selling lightly. Just think of the unfortunate German decision at Wirecard. But it’s worth taking a closer look.
China is not a safe haven
According to the fifth myth, Europe and China will develop into safe financial havens simply because of the problems of the US banks. On the other hand, European banks are also struggling with massive challenges because they invest too heavily in government bonds. The feared vicious circle between banks and states that broke out in the euro crisis in 2010 still exists. Then as now, European banks were too focused on their home countries. Completing the internal market for financial services would therefore be an important lesson to be learned from the current crisis.
Finally, the assertion that international capital is looking for China as a safe haven in times of financial market turbulence overlooks essential aspects. China has actually made massive efforts to make its financial system more independent from the USA.
But the legal, political and economic framework means that international investors are acting cautiously with regard to the People’s Republic – especially in times when interest rates in the USA are continuing to rise.
No crisis is like the last one. And crises always arise where you didn’t expect them at first. It is all the more important to gain new insights from current crises and to use them to reform the international financial markets.
The author: Jörg Rocholl is President of the European School of Management and Technology Berlin.
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