“No bank holds enough cash to handle a run of withdrawals if confidence in its finances falls” – Pedro Antunes

It would be nice if we could say that we are facing an unprecedented situation… but this is not the case. Problems with banks are nothing new, just remember the not so distant crisis of 2008.

Although it is difficult to point to the case of Silvergate Capital, the main cryptocurrency payment channel linking the crypto industry with the traditional banking system, which was forced to shut down its operation and liquidate its assets after the bankruptcy of FTX – which culminated in successive heavy financial losses by Silvergate Bank’s parent company – as the starting point for this new shakeup in the banking world, it should be noted that this was a case where there was a huge flow of withdrawals, the result – not only, but also – of a sharp drop in confidence in the institution. And this seems to be a common denominator in the process of the various domino pieces falling in times of crisis.

Already in March of this year, Silicon Valley Bank (SVB), until then the 16th largest bank in the US in terms of assets, went bankrupt – considered the largest since the 2008 financial crisis – after a massive withdrawal of funds by its clients, which mostly included companies in the technology sector, such as Shopify and Pinterest.
But the turmoil didn’t stop there: days later it was Credit Suisse’s turn to find itself in trouble, after the Saudi National Bank announced it would not move forward with further investment – it should be remembered that this institution became Credit Suisse’s largest shareholder after investing 1530 million euros in shares, following a recovery plan launched by the Swiss bank in October 2022 – as a way to combat the crisis caused by the liquidity withdrawals suffered last year, amounting to 126 million euros – and which included a capital increase of 4090 million euros, the dismissal of 9000 employees worldwide and a 15% cost reduction. All this culminated in the purchase of the Swiss bank, until now considered the second most important banking establishment in the country, by competitor UBS.

The succession of cases generates a environment of instability and fear: both for those who have a lot of money and for those who face the possibility of losing their life savings.

To better understand the causes behind (yet) another financial and banking crisis, what its implications are and what we can expect to happen in the future, we had the help of Dr. Pedro Antunes, Chief Economist at The Conference Board of Canada.

Milénio Stadium: Can we look at the Silvergate case in 2022 as the match that lit the fuse for this current banking crisis?
Pedro Antunes: It’s difficult to know precisely if Silvergate Capital, a cryptocurrency focussed bank, was the one that lit the fuse, but it was the first to endure a stream of withdrawals and forced to cease operations on March 8. The issue affecting the finances of many banks is linked to the sharp and rapid increase in interest rates over the past year that has devalued bank assets (especially holdings of long-term bonds). Many banks are now facing public (and social media) driven scrutiny about their financial viability, but a lack of confidence can put any bank at risk as no bank holds enough cash to handle a run of withdrawals if confidence in its finances falls.

MS: Given the credibility and reliability that Swiss banks have always had, how do you explain that an institution like Credit Suisse has come to this point? And what about its image now?
PA: Unfortunately for the reputation of Swiss banks, Credit Suisse’s problems started much earlier, the Bank has been plagued with scandals over the past few years and its share prices dropped sharply through most of last year. Credit Suisse was facing financial pressure last year because mismanagement had led to sizable withdrawals. The trigger for the Bank’s failure was likely related to the announcement by Saudi Bankers that they would not purchase additional share in Credit Suisse. The Bank then suffered a run and couldn’t meet financial obligations. Credit Suisse has now been purchased by banking giant UBS, I suspect the purchase will instill calm and UBS will likely have to work to correct the Bank’s reputation.

MS: But Credit Suisse, as we know, is not an isolated case. What factors can we point to as being primarily responsible for the current banking crisis and turmoil in the stock market?
PA: From what I can gather, the banks that have failed have made mistakes in managing their finances—specifically, too large a share of assets held in long-term bonds prior to the runup in interest rates. I wouldn’t characterize this as a crisis, certainly we’re far from the situation that occurred in 2008-09, but it is concerning. The issue is one of confidence against a backdrop of increased scrutiny. Central banks and governments have stepped in to try and calm markets but there’s no doubt that confidence has been eroded. Bank stocks all over the world have taken a hit and access to capital made more difficult.

MS: How do the financial markets look at and have they dealt with this whole situation?
PA: I think the situation is calming down. Central banks have rescued depositors and shareholders and put in place measures to secure lending and liquidity (through swap lines and loans) to banks that need it.

MS: Could new dominoes fall? In other words, can we really be facing a new financial crisis on a global scale like the one in 2008?
PA: Yes, more dominoes could fall (there are roughly 4,000 national and regional banks in the United States alone) but this is very different from the MBS security crisis that we saw in 2008. Since 2008, regulatory oversight on Banks has increased dramatically and a multitude of regulations and backstops will secure the financial system.

MS: And more specifically in Canada – what will be the expected effects?
PA: Canada’s banking sector is very different from the United States, we have a few large banks that are less exposed to external events. In fact, Canadian banks did well during the 2008-09 financial crisis in comparison to banks in other countries. We shouldn’t see much in the way of direct effects on Canada’s banks. If there is an impact, it would be that the current shakeup leads to weaker near-term global and US economic growth. In this case, Canada’s economy would be affected from lower export volumes and lower export prices.

MS: Will Canadian banks be safe? What kind of legislation currently exists to protect depositors and investors?
PA: Yes. For example: the Office of the Superintendent of Financial Institutions (OSFI) has stepped up efforts since 2008 to ensure Canadian banks are solid. Measures included increased liquidity requirements, holding more high-quality capital and ongoing stress testing. Deposits in Canadian banks are insured by CDIC and the government has stepped up mortgage underwriting rules for households taking on mortgages (in a sense, stress testing the ability of households to pay their mortgages should interest rates come up).

Inês Barbosa/MS