High-income countries

In March, high-income countries averted global banking crisis

By taking decisive measures fast, authorities in the USA and Switzerland prevented failing banks from disrupting the financial system. In both cases, conventional rules were disregarded.
Swiss authorities made UBS take control of Credit Suisse – bank logos on different buildings in Zurich. picture alliance / KEYSTONE / MICHAEL BUHOLZER Swiss authorities made UBS take control of Credit Suisse – bank logos on different buildings in Zurich.

In the USA, two regional banks failed in California (Silicon Valley Bank and First Republic), and so did one in New York (Signature Bank). By asset size, they ranked 14th, 15th and 16th nationally. Their problem was that so many depositors lost faith in them and withdrew assets, that they became unable to pay. In the course of a few days, Silicon Valley Bank and Signature were shut down and put under the control of the Federal Deposit Insurance Corporation (FDIC). In early May, First Republic was shut down too.  

The FDIC normally guarantees assets worth $ 250,000 per depositor. This time, however, the Federal Government made the informal decision to cover all assets, providing protection even to super-rich clients of the failed banks. The government wanted to prevent further bank runs by making clients of other banks confident that there was no reason to worry.

The guiding idea was to take determined and timely action to avoid contagion. The central bank (Federal Reserve), moreover, immediately rose to its role as lender of last resort, providing limitless fresh liquidity to any bank able to offer collateral. Shareholders lost their investments, but depositors were fully protected. So far, a full-blown banking crisis was avoided.  

In Switzerland, Credit Suisse – a systemically important financial institution of global relevance – was on the brink in March. National authorities organised a swift ad-hoc merger with giant rival UBS. In the process, bank bonds were wiped out, even though, according to the international norms, shareholders were supposed to suffer first.

The Swiss authorities preferred to reassure them to the detriment of other stakeholders. Bondholders are challenging the decision in court.

The good news is that, in Switzerland too, the crisis was not allowed to spread. The collapse of Credit Suisse might easily have triggered a global meltdown of the financial sector.   

Both in the USA and Switzerland, timely intervention, plentiful resources and crisis management expertise were crucial. International cooperation helped. Central banks were prepared to facilitate currency swaps in case of need – but that need did not arise. Swift and flexible action limited the damage, so the failure of individual banks did not become a macroeconomic issue (see main story).

Further problems cannot be ruled out. The bank failures were linked to poor management decisions in the low-interest rate era.

Nonetheless, both the Federal Reserve and the Swiss National Bank have raised interest rates in recent weeks. They thus stayed focused on fighting inflation. Having prevented a full-blown crisis of the financial system in March, both the Fed and the Swiss National Bank apparently feel they are in full control.  

Observers from economies which are suffering serious debt problems wish their issues were tackled with similar speed, creativity and effectiveness. Instead, many countries – Pakistan for example – are stuck in a depressing downward spiral and only get inadequate relief.

José Siaba Serrate is an economist at the University of Buenos Aires and at the University of the Centre for Macroeconomic Study (UCEMA), a private university in Buenos Aires. He is also a member of the Argentine Council for International Relations (CARI).
josesiaba@hotmail.com

 

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