Banking crisis: Have we learnt nothing?
Following the downfall of multiple US banks, Credit Suisse, as well as uncertainty about Deutsche Bank, the EU should close its gaps in its banking regulation, argues Rasmus Andresen.
What began with reports of troubles at US regional banks is turning into a major banking crisis following the Credit Suisse collapse and side effects on Deutsche Bank stocks.
Yes, there are differences to the situation in 2008. And European Central Bank (ECB) President Christine Lagarde did everything she could to ward off the impression of a crisis spreading to Europe when she visited the European Parliament.
Yet it strikes at a time of global uncertainty due to the Russian war of aggression in Ukraine and many of the effects still unfolding or unclear.
It all started with the bankruptcy of Silicon Valley Bank. The name may not have been familiar to everyone until then. But in terms of size, it still ranks 16th among US banks. In the same week, two regional crypto banks, Silvergate and Signature Bank, were also forced to close. The fallout could have serious consequences for the global banking system and economy.
Global efforts to regulate banks more tightly to prevent another financial crisis have lost significant momentum over the past decade.
While shortly after the financial crisis and the Lehman Brothers bankruptcy, politicians and bank executives vowed to do everything possible to prevent similar bankruptcies, in recent years hardly anyone could remember the causes of the crisis and those promises.
Important milestones introduced in banking regulation as a result of the crisis at the time have since been reversed. The most prominent example is the 2018 amendments to the so-called Dodd-Frank Act pushed through by Donald Trump with bi-partisan support. The amendments passed at that time brought comprehensive exemption rules for so-called “mid-sized” banks.
Arguments at the time that “small” companies, which included the not-so-small Silicon Valley bank, should not be burdened with too much regulatory scrutiny must seem highly questionable or even alarming to us today.
But it would be too easy to just rail against Trump and dismiss the problem of deregulation in the banking sector as an American issue.
For one thing, Trump’s legislative proposal was supported by a broad bipartisan majority. And for another, we are also observing similar tendencies in Europe: during the current negotiations on the EU banking package, conservatives and liberals have repeatedly called for similar exemptions and relief for “medium-sized” banks. German and liberal MEPs in particular should reconsider their previous stance and join us in closing loopholes.
What is clear here is that the banking lobby has been able to take advantage of the waning public interest in bank regulation over time to lobby for massive deregulation under the radar.
The current bank failure in the US must now be a wake-up call: stringent bank regulation is a sine qua non for our financial stability. We must not get lost in debates about (un)reasonable administrative burdens for banks and thereby completely lose sight of a substantial segment of the banking sector.
In concrete terms, this means the following for us in Europe: What is happening in the U.S. will have implications for the upcoming revision of the EU’s crisis management and deposit insurance (CMDI) framework.
Silicon Valley Bank, as well as the other two insolvent banks, were categorised as medium-sized banks of limited significance. This questionable assessment resulted in the aforementioned regulatory relief measures, including those related to stress testing and resolution planning.
The EU has faced similar problems in the past when medium-sized banks were bailed out rather than being resolved. Closing these loopholes is the main goal of the upcoming CMDI legislative process, and the lessons from the current US banking crisis need to be urgently reflected in the EU’s new resolution framework. We Greens strongly believe that now is the time for European deposit insurance.
Beyond legislative lessons, we can only hope that the impact of the bank failure on the EU will be limited. Silicon Valley Bank’s presence within Europe was quite limited anyway Nevertheless, the broader impact on the EU economy and financial sector remains unclear.
The factor that ultimately led to the collapse of Silicon Valley Bank was the aggressive interest rate policies currently being pursued in both the U.S. and the EU. SVB’s business model was inadequately hedged against this monetary policy environment.
So while this strategy of putting all the eggs in one basket is in many ways a self-made problem, it should also be a cautionary reminder to central banks that their current rapid increases in interest rates have massive implications with risks to financial stability that are difficult to calculate.