Another banking crisis: How has it come to this?

A week ago we were being reassured by regulators and an army of experts that the collapse of Silicon Valley Bank was an isolated case and that there would be no contagion across the banking and global financial system. Those reassurances look rather futile and misplaced today, as we wake up to the news that another bank, First Republic, has had to be rescued, following the dramatic intervention of the Swiss Central Bank to stabilise Credit Suisse.

How has it come to this just 13 years after the last crisis in the global banking system?

Of course, it is different this time. In 2008 it was the failure of banks and regulators to spot the risks bubbling up in the US sub-prime mortgage market and the implications for a range of financial instruments built on those shaky foundations. This time it is the rise in interest rates as major economies try to put the brakes on inflation.

Just stop for a moment to think about that.

If banks cannot identify and manage interest rate risks what is going on? Surely, this should be a core skill. What appears to have happened is that the years of cheap money and rock bottom interest rates have so distorted business models and blunted risk management skills that we now find ourselves teetering on the brink of another global banking crisis.

You may ask where have the regulators who promised tougher regimes, better monitoring and forensic stress testing been?

There is an ugly war of words brewing among global financial regulators with the principal European regulators pointing angry fingers at their US counterparts for watering down some of the safeguards put in place after the Global Financial Crisis at the behest of many banks, including SVB. There is a lot of truth in this accusation but the UK and Europe is not without its share of blame in relaxing their scrutiny of bank’s business models and asking searching questions about their ability to respond to changing market conditions.

We must pause solvency reforms in UK
While the world’s financial markets look around nervously to see whether the contagion will spread further, there needs to be a rapid reassessment of the various plans in the pipeline to relax solvency rules for banks, insurance companies and pension funds, especially in the UK where the reform agenda has been hijacked by Brexit zealots. Their desire to portray the UK as an easier place to set up and do business in the financial services sector is fraught with danger and the planned watering down of the solvency rules for insurance companies and pension funds needs to be reined back and paused so its impact can be reassessed in the light of the latest wave of instability whirling around the global financial system.