The successive crises related to banks that the world has witnessed in the past years, the most recent of which is the collapse of Credit Suisse and Silicon Valley banks, with the required government intervention, raises questions about the way banks work, which sometimes poses grave risks to the economy.
The giant Swiss bank and the local American bank faced severe criticism for their mismanagement as a factor exacerbating their problems.
The collapse of the two banks sparked panic in the banking sector and financial markets, and fears that the consequences would be reflected on the global economy at a time when it suffers from severe inflation and slow growth.
Two weeks after the first turmoil, US Federal Reserve Chairman Jerome Powell on Wednesday acknowledged the risks of “tightening lending conditions to households and companies” at a time when the central bank raised interest rates by a wide margin to tackle inflation, causing a slowdown in the economy.
labor market and inflation
Powell warned that this could “weaken demand, the labor market and inflation”, while European Central Bank President Christine Lagarde warned on the same day of “new downside risks” in light of an already fragile economy.
However, the situation is still far from the storm that followed the collapse of the US giant Lehman Brothers 15 years ago.
But ratings agency Moody’s warned in a note on Wednesday of “the risk that (the leaders) will not be able to stop the current turmoil without having lasting and potentially severe repercussions on the banking sector and beyond.”
But the agency is betting on calming the situation.
“Confidence in the banking sector as a whole has not been shaken,” Zsolt Darvas, an economist at the Bruegel Institute in Brussels and a former researcher at the Hungarian Central Bank, told AFP, explaining that he did not see major risks.
The authorities harnessed great means as soon as the signs of the problem appeared, so the US administration gave implicit guarantees to all bank depositors, while the Swiss government provided several guarantees to UBS in order to acquire Credit Suisse.
If this intervention was not a rescue, it raised questions. Eric Dorr, director of economic studies at the IESEG Trade Institute, said that “the demand for the intervention of public authorities is increasing” due to fears that a new banking crisis could turn into an economic crisis.
This also raises a broader question about the legitimacy of public support measures when banking crises are often caused by administrative problems.
“boring and ironic”
“We wish we didn’t have banks, those ironic and boring bodies that are neither really public institutions nor really private companies,” Nicolas Ferron, a researcher at the Peterson Institute for Studies in Washington, told AFP.
He continued, “The reality is that we have not found a better system. We are still in a middle ground, between the nationalization of the banking system and a system that does not enjoy any guarantee from the state that we know with certainty leads to completely destructive instability on the social level.”
This has sparked many calls in the past few days to tighten controls on banks, whether from Jerome Powell or Joseph Stiglitz, who won the Nobel Prize in Economics, or even the influential commentator in the Financial Times Martin Wolf, who called for considering banks as “public services.”
“If we look at it like this, then it doesn’t need to be very profitable,” he said in a podcast by the newspaper. “It should … be capitalized to allow it to survive the tough times, because that’s the best it can do.”
A parallel debate revolves around the possibility of keeping the funds of depositors from families and companies directly with central banks.
Then the banks will no longer be able to access the deposits of individuals and companies, which dispels the risks of depositors rushing to withdraw their money, as happened in the recent crisis.
