Black Wednesday in the markets. After the bankruptcy of Silicon Valley Bank (SVB) last week, it’s Credit Suisse’s turn to create panic. The title of the Swiss establishment collapsed by 30% on Wednesday March 15, dragging other banking stocks in its wake.
After the intervention of the Swiss authorities, the action of Credit Suisse rebounded. But a question still stirs people’s minds: are we experiencing the beginnings of a new financial crisis, fifteen years after the subprime crisis? Eric Dor, director of economic studies at the IESEG School of Management, delivers his analysis to Le Point.
The Point: After the panic created by SVB last week, Credit Suisse shook up the banking sector on Wednesday. Are we on the verge of another financial crisis, like in 2008?
Eric Dor: We are not at all in the same situation as in 2008. The causes that explain these two banking storms are very specific. During the subprime mortgage crisis, the problem was systemic: it affected every bank in the world that had purchased subprime-backed assets and therefore suffered losses. As a result, mistrust had set in and the banks no longer wanted to lend to each other on the interbank market. Central banks and states had therefore been forced to intervene to save them.
The bankruptcy of SVB is due to a management error and the rise in rates: the deposits had been massively invested in bonds. However, when interest rates rise, the value of these assets automatically depreciates. Moreover, SVB had not hedged against this risk.
The market had calmed down at the beginning of the week, but given the climate of mistrust, it didn’t take much to start the panic again. The statement of the main shareholder of Credit Suisse [the president of the Saudi National Bank Ammar al-Khudairy, who ruled out any additional help, Editor’s note] worried the markets.
But this bank is also a specific case. It has been accumulating expensive cases for several years, with in particular the bankruptcy of the American fund Archegos or the scandal of the British Greensill Capital. It had to be recapitalized at the end of last year, announced in early February heavy losses for the year 2022 and admitted, earlier this week, weaknesses in its internal controls.
Why have the markets panicked if these issues are specific?
At first glance, there is an element of epidermal and irrational reaction. But if you scratch a little, investors are afraid of the impact of rising rates on banks, and potential losses if they were to sell their bonds. The next few days could still be a bit hectic because all the banks will be scrutinized and there will be doubts about those that have weaknesses.
That said, I am not very worried about European systemic banks: they are subject to stress tests, in particular on their sensitivity to interest rates. In addition, central banks are ready to intervene in the event of a problem.
We saw it in the United States, with the FED taking measures to restore confidence. The Swiss National Bank (SNB) also came to the rescue of Credit Suisse. And the European Central Bank (ECB) would no doubt do the same if a European banking establishment were in trouble. Central bankers are the chief firefighters in the event of a fire!
Financial instability does not seem to have worried the ECB, which nevertheless announced a rate hike on Thursday. How to explain it?
The Central Bank must maintain its credibility in the fight against inflation. Since the rate hike had been announced for a long time, she could afford it. Additionally, they may have reassuring data on the state of the banking system. But if the markets panic again, she may have to be more cautious: the goal of financial stability takes precedence over that of fighting inflation. She could then take a break.