Many of us remember the credit crisis from 2008 and the years and years of economic gloom that followed it,
However, are we heading towards another banking crisis?
At the time of writing three banks (namely Silicon Valley Bank, Credit Suisse and First Republic Bank) have experienced issues and needed to be taken over and or saved by bigger banks. Although the current situation does not appear to be as serious as 2008 but is important to note that 2008 started with a number of perceived smaller failures which expanded into serious issues due to the lightning speed of financial markets.
My first worry is the risk of contagion, which would be fuelled by fear, worry and the general feeling of doom and gloom in the economy. This contagion would result in people withdrawing their monies and investments which would, in turn, cause liquidity issues for banks. In effect, this becomes a real self-reinforcing cycle of problems and would result in a loss of confidence in financial services and the banking industry generally, (It is important to remember that financial services are primarily built on people’s confidence).
However, one would hope that the changes implemented since 2008 (both culturally, regulatory and technologically) would make the industry more robust and that the central banks, regulators and larger industry players would be more alert to these issues so they can react quicker, as opposed to being in denial and just thinking I think will sort itself out.
However, my main fear is threefold.
- Firstly, people in the financial services industry have forgotten the pain of 2008 and therefore, do not realize how serious these problems are and do not react quickly enough.
- Secondly, while a large amount and new regulations have been implemented, firms have only implemented the ‘rules’ and do not really understand the underlying tacit reasons for them. There it could mean they are blind to the issues and (even worse) the implemented rules give a false sense of security.
- Thirdly, there have been a large number of smaller new entrants to the industry since 2008. While this is good for competition and for moving the industry forward, one could argue (a) that these new firms’ processes, technology and culture are not as mature as the other participants and (b) their relatively small size is not bulky enough to withstand any liquidity shocks.
Therefore, while it is clear that there are issues within banking, I hope that both (a) the new regulations implemented since 2008 and hopefully (b) the memory of the pain experienced in 2008, will mean that the industry, firms and society, in general, will not let another credit or banking crisis happen again.
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