The past 10 days have shaken banks around the world and will dent economic confidence already eroded by interest rate hikes, inflation and the aftermath of the war in Ukraine.
For some, the collapse of Silicon Valley Bank had eerie echoes of the global financial crisis as Bear Stearns and Lehman Brothers went under. The demise of the mid-tier US lender this time brought down two other US banks, Signature and First Republic, and forced the Swiss government to bail out the struggling Credit Suisse.
Bank of Ireland, AIB and Permanent TSB stocks were also hit, reinforcing the parallels to 2008 and the St Patrick’s Day massacre that pushed the Anglo Irish Bank below her waterline and silenced the Celtic tiger’s roar.
For if the wings of a butterfly in distant California make the gnomes of Zurich tremble in their boots, what keeps the reverb from pulsing through Dublin?
In just four trading sessions through Wednesday, Irish bank shares fell about €4 billion, hitting the state’s stake in AIB and PTSB for €1.25 billion.
Stocks recovered somewhat on Thursday and Friday after the powerful Swiss National Bank (SNB) granted emergency loans to Credit Suisse. But such intervention is no real substitute for a longer-term restoration of confidence.
The European Central Bank’s half-a-point rate hike on Thursday also likely helped, signaling that policymakers believe euro-zone banks can cope with tightening monetary conditions.
While nothing fundamental has changed in the Irish banking sector, there is a feeling that last week’s woes are not helping on the fringes, where sentiment can be a determining factor.
2022 results and 2023 prospects from AIB and the Bank of Ireland earlier this month supported a generally optimistic tone among Irish banks. The promises of more than 700 million euros in dividends and share buybacks also helped.
The ECB has warned banks against saving capital to deal with non-performing loans in the event of a downturn and may decide to tell Irish banks to be a little less generous when giving cash to shareholders.
However, an outright ban on dividends and buybacks, as was the case at the start of the pandemic, is considered unlikely.
But how did it all start? How did we go from rude health to fear of contagion so quickly?
Silicon Valley Bank, the banker of California’s tech sector, took the wrong side of rate hikes by taking large, chunky deposits from its venture-backed start-up clients and investing them in fixed-income securities.
When these bonds fell in value due to rising interest rates, the SVB had difficulty withdrawing deposits and tried to raise new capital. This scared customers who rushed to get their money out and prompted US regulators to step in with deposit insurance and emergency funding.
Other banks, such as Signature in New York and First Republic in San Francisco, ran into trouble, but swift action by authorities helped halt widespread bank runs.
To get a sense of the scale, the Federal Reserve’s emergency lending to banks last week was larger than during the 2008 “Lehman moment,” when the entire financial system collapsed.
These issues are likely to become apparent over months, not hours or days
Nonetheless, panic swept across the Atlantic at troubled Credit Suisse, which revealed problems with its internal controls on Tuesday, prompting a chain of events that ended with the SNB offering a funding line for the global investment bank stepped in.
In the midst of it all, Christine Lagarde announced an expected 0.5 percent hike in ECB interest rates, signaling that the bank remains focused on fighting inflation rather than giving in to worries in financial markets.
“The larger increase is a clear signal of confidence in the strength of the European banking sector. The narrative of fragility in the global banking sector will not be resolved overnight. The ECB has stressed that it will monitor the situation closely,” said Matthew Ryan, head of market strategy at Ebury.
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ECB President Christine Lagarde
ECB President Christine Lagarde
According to an Allianz report, the health of European banks has improved significantly over the past decade, which should include any spillover effects.
Allianz and ECB data showed that Irish banks are among the least exposed domestic government bonds and therefore do not suffer from the same problems as the SVB.
But after more than a week of massive market volatility, this fear will inevitably make its way into the real economy.
Fears of a recession in Europe had eased recently, although there are now fears that battered banks will shy away from risk and fewer loans will be granted.
That alone could fuel a downturn.
Asset manager Amundi called the “reassessment of recession risks” an underlying factor behind the rapid plunge in equities.
“The main focus is not on the risk of a bank run, but on the impact of this crisis on broader lending conditions and the deeper structural vulnerabilities of smaller banks (particularly in relation to commercial real estate),” said Dario Perkins, managing director of independent research firm TS Lombard in a tweet on Thursday.
“These issues will likely become clear over months, not hours or days.”
https://www.independent.ie/business/world/after-a-week-of-turmoil-forces-that-shook-banks-look-set-to-spill-over-to-the-real-economy-42392744.html After a week of turbulence, forces that have rocked the banks appear to be spilling over into the real economy
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