Financial worries still with us but bank on avoiding the worst (Birmingham Post article 20.04.2023)

Turmoil in the banking sector is having a knock-on effect.

Tighter financial conditions as banks are less willing to lend capital; interest rates may remain higher for longer to deal with inflation which puts pressure on borrowing costs; increased scrutiny of banks and potential changes to banking regulations; and volatility in global markets to stay elevated in the short term.

Nevertheless, the UK is better protected than most and the Stock Market has been holding up.

The Bank of England insists the banking system here is “well capitalised and funded, and remains safe and sound”.

It all began with the collapse of Silicon Valley Bank and Signature Bank in the United States – both catering largely to the tech sector. More worryingly, the crisis then took down Credit Suisse, forced into a shotgun marriage with UBS.

In truth, though contagion can spread, we do not appear to be talking 2008, the financial meltdown which threatened the world economy. Albeit, central banks have been worried enough this time round to announce new measures to make extra cash available and ensure financial transactions continue as normal, the kind of action that last went on back then.

Far from the image of Swiss banks being conservative, reliable, safe havens during turbulent times, Credit Suisse had problems – risk management issues, scandals including money laundering, poor corporate governance, and a culture of greed.

It all built up to destroy market confidence in the brand.

“They bungled, took risks they couldn’t control and made insane amounts of money doing it,” Swiss Trade Union Confederation chief economist Daniel Lampart told Swiss public television SRF.

The BBC noted: “The US bank casualties faced different challenges. Signature took a hit from recent big falls in the value of cryptocurrencies, and both found their balance sheets weren’t robust enough to cope when depositors rushed to take their money out.

“But there is a common factor affecting all three and the banking sector more broadly: sharply rising interest rates.

“Central banks have been raising the cost of borrowing to try to dampen down rising prices. Banks holding government bonds that go down in value when interest rates rise, have suddenly found their assets are worth less.

“There isn’t the same system-wide problem that there was in 2008, when banks around the world suddenly found they were exposed to rotten investments in the US housing market. Since then, banks have been ordered to hold more capital and regulations around risk have been tightened.”

Though, it cautioned: “We could still see regulators toughening up the rules further and banks pulling back on their willingness to lend. That could put a chill on the global economy, at a time when it could do without it.”

However, is there more to this than meets the eye?

Mobile banking, it is argued, has changed everything. While information can spread within seconds, money can now be withdrawn just as quickly.

“The first bank crisis of the Twitter generation” was how Paul Donovan, chief economist at UBS Global Wealth Management, described it to CNBC.

Social media gives “more scope for damaging rumours to spread” agreed Jon Danielsson, director of the Systemic Risk Centre at the London School of Economics.

He suggested: “The increased use of the internet and social media, digital banking and the like, all work to make the financial system more fragile than it otherwise would be.”

Jane Fraser, Citi CEO, confirmed: “It’s a complete game changer. There are a couple of tweets and then this thing [the collapse of Silicon Valley Bank] went down much faster than has happened in history.”

Social media – boon or curse?