Poor leadership, weak banks, lost bonds: Experts respond to latest in banking crisis

Experts in finance at Bayes Business School say the latest developments impacting the global banking sector are representative of the lack of leadership and planning following the 2008 financial crisis.

Following the collapse of Silicon Valley Bank (SVB) over a week ago, the impact on the global banking sector has been significant. Credit Suisse (CS) saw their shares plummet by 30 per cent last week before UBS stepped in over the weekend to agree a historic government-brokered deal worth $3.25bn.

This morning, bank shares continued to fall across Europe, the prices of AT1 bonds – risky bank debt – tumbled impacting concerns in the bond market, gold prices reached a near-to record high and more than $150 billion was borrowed by banks from the Federal Reserve’s ‘discount window’ – which is used to provide stability to the US banking system.

Professor Vasso Ioannidou and Dr Sotiris Staikouras are experts in banking at Bayes Business School (formerly Cass).

Professor Vasso Ioannidou, Professor of Finance, said she was worried that decisions taken in home countries may have wider reaching consequences, highlighting the need for the authorities to ‘restore calm’.

“EU authorities are concerned about contagion on other banks with similar bond exposures,” she said. “Additionally, we are seeing increased signs of flight to safety. The gold price breached $2,000 for the first time since summer 2020 and US banks are borrowing from the FED discount window, worse than at 2008 levels.

“It is worrying that once national supervisors try to contain a developing situation in a home country (e.g., US regional banks, CS in Switzerland), they often end up taking difficult decisions that may be needed in that situation but may also have negative externalities on other countries.

“For example, I am not quite sure what is the reason that the AT1 bonds have been written to zero in the CS deal while the equity holders are saved (and bonuses will still be paid). Such moves are clearly raising the risk in bond markets with clear possible adverse effects on other countries. EU regulators (European Central Bank, Single Resolution Board, and European Banking Authority) are now running to reassure investors that Eurozone banks will not suffer the same fate. Similarly, the decision of US supervisors last week to immediately cover all uninsured depositors of SVB is another example of unilateral decisions that undermine institutions at other countries.

“A big concern about the medium-term is whether the developments of the past week will force central banks to pause their fight against inflation (stop or reverse interest rate increases). Depending how things develop in the following days this may be needed, but it would certainly not be a good place to end as it will prolong the period of higher inflation.

Professor Ioannidou said the loss of confidence in investors meant the subsequent bank run was unsurprising and also difficult to stop, meaning banks remain exposed.

“Once runs like these begin are very hard to stop without unlimited blanked guarantees,” she said. “In these situations, any bank with any weaknesses may fall pray – as was the case with Credit Suisse after the SVB failure. In the absence of SVB, nothing would have happened with CS last week. They were weak and once investors lose confidence and begin to run any bank with weaknesses may become untrainable. This is a space to watch.”

Dr Sotiris Staikouras, Senior Lecturer in Banking & Finance, brushed away concerns that the last week’s banking upheaval will be reminiscent of the 2008 financial crisis, highlighting that CS is not a bank that was rescued during the credit crunch as opposed to its rival UBS. This has come with drawbacks for CS.

“UBS has learned its lesson, adapted to a more conservative banking style and, thus, managed to dodge any surprises,” he said. “On the other hand, Credit Suisse was plunged into constant leadership problems of various natures; clearly, they did not learn any lessons and continued into an impulsive pathway.

“For a bank of Credit Suisse’s size to fail, it simply boils down to imprudent investment management and could be easily described as reckless investment betting. While CS is not interlinked with other financial intermediaries and this has negated the possibilities of what we saw in 2007, this incident has tarnished the image of Swiss banking, while reputation risk and management are back on the global banking agenda.”

Dr Staikouras condemned the leadership of banks, and pointed the finger at governments and credit rating agencies, saying that the under-pricing of risk makes such events liable to happen.

“Yes, shares will fall but will bounce back; and markets will react but will stabilise; but does banking leadership of this kind ever go away? How was this allowed to happen after a crisis occurring not that long-time ago? 

“We cannot go on with such under-pricing of risk until repricing takes place. There is no practical alternative to banking, which is why it needs to be credible and transparent. If we keep allowing such leadership to prevail, then this fails market discipline and encourages moral hazard. Governments and credit rating agencies should be proactive rather than being the remedy to the problem.”