Poor leadership, weak banks, lost bonds: Experts respond to latest in banking crisis

Financial experts at Bayes Business School respond to rising gold prices, debt relief and banking bailouts.

Financial experts at Bayes Business School say recent developments affecting the global banking sector are representative of the lack of leadership and planning following the 2008 financial crisis.

Following the collapse of the Silicon Valley Bank (SVB) over a week ago, the impact on the global banking sector has been significant. Credit Suisse (CS) saw its shares plunge 30 percent last week before UBS stepped in over the weekend to agree a historic $3.25 billion government-brokered deal.

This morning, bank stocks continued to fall across Europe, AT1 bond prices – risky bank debt – plummeted, impacting bond market worries, gold prices hit near record highs and more than $150 billion was secured by federal government banks borrowed The reserve’s “discount window” – used to provide stability to the US banking system.

Professor Vasso Ioannidou and Dr. Sotiris Staikouras are banking professionals at Bayes Business School (formerly Cass).

Professor Vasso Ioannidou, professor of finance, said she was concerned that decisions made in home countries could have wider consequences and stressed the need for authorities to “restore calm”.

“EU authorities are concerned about contagion of similar bond exposures to other banks,” she said. “We are also seeing increasing signs of a flight to safety. Gold prices broke through $2,000 for the first time since summer 2020 and US banks are borrowing from the Fed’s discount window, worse than 2008 levels.

“It is worrying that once national regulators attempt to contain an evolving situation in a home country (e.g. US regional banks, CS in Switzerland), they often end up making difficult decisions that may be required in that situation , but can also have negative external effects on other countries.

“For example, I am not entirely sure what is the reason that the AT1 bonds were written to zero in the CS deal while shareholders were bailed out (and bonuses continue to be paid). Such moves clearly increase risk in bond markets, with clear potential adverse effects on other countries. EU regulators (European Central Bank, Single Resolution Board and European Banking Authority) are now scrambling to reassure investors that eurozone banks will not suffer the same fate. Similarly, last week’s decision by US regulators to immediately protect all uninsured SVB depositors is another example of unilateral decisions undermining institutions in other countries.

“In the medium term, there is a lot of concern about whether developments over the past week will force central banks to halt their fight against inflation (hold or reverse rate hikes). Depending on how things play out over the coming days this may be necessary but it would certainly not be a good ending as it will prolong the period of higher inflation.

Professor Ioannidou said the loss of investor confidence meant the ensuing bank run was unsurprising and also difficult to stop, meaning banks remained exposed.

“Once runs like this start, they’re very hard to stop without unlimited hidden guarantees.” She said. “In such situations, any bank with any weaknesses can fail – as was the case with Credit Suisse after the SVB bankruptcy. Without the SVB, nothing would have happened at CS last week. They were weak, and once investors lose confidence and start running a bank with weaknesses, it can become untrainable. This is a space for watching.”

dr Sotiris Staikouras, Senior Lecturer in Banking & Finance, brushed aside concerns that last week’s banking crisis will be reminiscent of the 2008 financial crisis, stressing that unlike its rival UBS, CS is not a bank that was bailed out during the credit crunch . This has brought disadvantages for CS.

«UBS has learned its lesson, adapted to a more conservative banking style and thus avoided surprises» he said. “On the other hand, Credit Suisse was plunged into constant management problems of various kinds; You clearly haven’t learned any lessons and have continued on an impulsive path.

“For a bank the size of Credit Suisse to fail simply amounts to careless investment management and could easily be described as reckless investment betting. While CS is not connected to other financial intermediaries and this has nullified the possibilities of what we saw in 2007, this incident has tarnished the image of Swiss banking while putting reputational risk and management back on the global banking agenda.”

dr Staikouras condemned the banks’ leadership and pointed the finger at governments and rating agencies, saying that underrating risks makes such events more likely.

“Yes, stocks will fall but will bounce back; and markets will react but stabilize; but does this kind of banking leadership ever go away? How could this have happened after a recent crisis?

“We cannot continue with such an under-assessment of risk until a re-assessment is made. There is no viable alternative to banking, which is why it must be credible and transparent. If we continue to allow such leadership, it will fail market discipline and encourage moral hazard. Governments and rating agencies should be proactive instead of solving the problem.”



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