Social unrest and nervousness caused by financial crises are part of the crises themselves and often accelerate rather than contain turbulent processes. We could be in a similar situation given the movements that have shaken the stock markets around the world after the bankruptcy of Silicon Valley Bank and Signature Bank, two entities affected by the wave of layoffs in the technology sector and the cryptocurrency crisis, in a scenario with echoes of both the bursting of the dot-com bubble in 2001 and the financial crisis of 2008. The US authorities have reacted quickly, guaranteeing all deposits to avoid contagion to the country’s regional banks and have established a new mechanism of liquidity to try to stop the loss of confidence in the sector.
Despite the moral hazard involved in covering all deposits (and not just those of less than $250,000, as required by law), the Joe Biden Administration has established a red line by differentiating between depositors and shareholders of the entity, which must bear the corresponding losses. European and Asian regulators have ruled out financial contagion from this episode due to the special nature of failed banks. But they also did not see a risk of contagion in 2008, when Bear Sterns bank collapsed until six months later when Lehman Brothers collapsed and ended up causing a global financial crisis. Prudence and vigilance must also be required on this side of the Atlantic. Although there are better systems than in 2008 to avoid financial contagion in fully interconnected capital markets, zero risk does not exist.
One concrete consequence that this banking crisis may have in the United States refers to the pace of the Federal Reserve rate hike. Just a week ago, its president, Jerome Powell, insisted that the institution was willing to accelerate the rise (now at 4.5%) if the economic data justified it. In the financial world it is said that interest rates rise until something breaks, usually in the form of a slowdown in economic activity. Now that something has broken, even if it was in the financial sector, it is possible that the pace of normalization will slow down. It does not seem easy that it can do a 180-degree turn, because inflation is still far from being controlled (it stood at 6% in February). The decision adopted by the European Central Bank (ECB) at its meeting this Thursday will reveal whether the European authorities fear that the sharp rise in interest rates decided since last July could cause similar impacts on the balance sheets of banks in the continent.
Despite all the regulatory rounds that followed the 2008 crisis, the United States continues to be the country where the greatest excesses in the sector take place. President Barack Obama promoted the Dodd-Frank law, which established the requirements for stress tests, risk committees, and capital and leverage ratios that banks must have. With the arrival of Donald Trump in the White House, those demands were softened and that seems to have contributed to the current crisis. The US authorities have a double task: they must analyze what has failed in supervision and, second, give a new twist to regulation to prevent episodes like this.
