Virendra Pandit
New Delhi: After the March 10 collapse of Silicon Valley Bank (SVB), two other banks slipped into the red in the US, and three more are in the spotlight—which, together, have evaporated USD 600 billion worth of investors’ money in a week, and threaten to spread globally.
Media reports on Saturday suggested that the UBS Group might acquire its Swiss rival Credit Suisse which is also facing a crisis.
At present, world markets are grappling with the sudden evaporation of USD 600 billion of market value from the 70 biggest US and European banks since March 6, a period that’s chiefly seen the SVB collapse, Credit Suisse Group AG receiving a USD 54 billion lifeline from the Swiss National Bank, and a USD 30 billion Wall Street whip-round for First Republic Bank.
Some leading bankers, however, believe it is an overreaction given the system is much better equipped to handle stress and central banks have stepped in with over USD 200 billion of assistance. Overall, the European banking sector remains strongly capitalized and very liquid.
While the crises at SVB and Credit Suisse may rekindle memories of the 2008 banking crash, things are different this time around. In that global financial crisis (GFC), banks were much less regulated, ran excessive leverage, and were poorly capitalized. Also, it was credit impairment in US mortgages that acted as a catalyst that then triggered a collapse. In 2023, the banking landscape is totally different, they said.
But others say that investor confidence is so shaky that contagion is a real risk and more intervention is needed — and fast.
“I am simply extremely concerned about financial contagion risk spiraling out of control and causing severe economic damage and hardship,” billionaire investor Bill Ackman tweeted on Friday. “I have said before that hours matter. We have allowed days to go by. Half measures don’t work when there is a crisis of confidence.”
Bond market veteran Anthony Peters said the market reaction to the last week’s events showed that some financial professionals simply did not trust the web of post-GFC regulation to save the system.
While there is little consensus around the possibility of contagion, there’s broad agreement that finance’s landscape has changed. Even the banks at the center of the storm have already been changed utterly. For instance, SVB’s former parent company has filed for bankruptcy.