The global financial system has so far been able to cope with the collapse of several banks. Are these isolated events, and has the crisis of confidence been overcome?
«There is, and there isn't» is how Andrea Orcel describes the extent of the current banking crisis. According to the CEO of Italian bank Unicredit, there were certainly twin shocks in the US and Switzerland, but they remained limited, not least because of the capital strength of European banks, the former head of investment banking at UBS said in an interview in «Businessweek» (behind paywall).
Orcel also sees no parallels to the global financial crisis of 2008 or the US savings and loan crisis in the late 1980s.
Endurance Test Passed for Now
The global financial system has undoubtedly been subjected to an endurance test in recent weeks. Starting in the US, various banks came under suspicion of being unable to withstand more rigid financial conditions or being in trouble because of faulty management.
The dust has settled somewhat in the meantime, as Raiffeisen Group economists point out in their latest analysis (in German). A cautious sounding of the all-clear can be heard above all from the US, where the Federal Reserve dialed back liquidity support. Banks borrowed a total of $153 billion through the discount window and the new Bank Term Funding Program, down $11 billion from the previous week.
Deutsche Bank out of the Firing Line
The situation also eased in Europe. Deutsche Bank in particular, whose condition had been the subject of speculation in recent days, is out of the firing line again. The Raiffeisen economists are encouraged by regulators continuing to rate the capital and liquidity position of eurozone banks as consistently robust.
In contrast to US regional banks, European banks are subject to stricter regulations over interest rate risk. There are additional capital requirements for mark-to-market losses on investments held to maturity.
Few Loan Defaults
In addition, eurozone banks for the most part still have large deposit cushions with the ECB, stemming from the ample supply of liquidity during the pandemic through their long-term refinancing operations (TLTROs).
Notwithstanding some catch-up effects from Corona-related insolvencies, loan losses remain low so far thanks to a resilient economy.
Spillover to Real Estate?
But skeptics don't trust the calm, fearing a full decade of zero interest rates has led to dangerous shifts in many portfolios. Pension funds increased investments in commercial real estate and alternative assets from 15 percent in 2007 to 23 percent in 2022 in pursuit of returns, according to figures from Willis Towers Watson.
Real estate could become a new trouble spot, especially in the US where about 60 percent of commercial real estate loans are made by smaller banks.
Central Banks Hitting the Brakes
Another indication that financial conditions will remain difficult is central banks moving toward quantitative tightening as a result of their restrictive monetary policy. While central bankers view balance sheet reduction primarily as a technical process, the financial sector is experiencing it as a classic deleveraging process.
Rising interest rates, rapid asset growth in less regulated areas, and deleveraging could morph into a perfect financial storm. In that case, the squall of isolated banking crises that just abated would have been merely the prelude to an impending systemic financial tsunami.
