An article by: Riccardo Fallico

In the early days of March 2023, markets around the world relived the nightmare of the 2008 financial crisis. Within fifteen days, the Silicon Valley Bank and Signature Bank bankruptcies in the USA left many operators holding their breath. In addition, in early May, another bank, First Republic Bank, experienced a sudden collapse in its shares on the stock market and an equally sudden takeover by JPMorgan.

The US banking crisis: neither limited nor regional

While we were still in the eye of the storm, the first analysis was under way of the causes and consequences of failure of these banks that were considered regional banks in the United States. However, once the dust settled, the operators themselves were forced to admit that the scale of this sudden crisis wasn’t in any way limited or regional in nature. According to the Federal Deposit Insurance Corporation (FDIC), which is an independent agency created by the US Congress to maintain the stability and public confidence in the nation’s financial system, approximately $548 billion in assets were wasted, give or take a few pennies, between March and May 2023, which is a little more than was spent in the entire 2008-2009 period, when an estimated $545 billion was burned. However, the most important data is the number of banking institutions involved: 3 in 2023 and 165 in the period 2008-2009. Just as then, the long wave of this financial tsunami that arose in the USA got reflected in all international markets, especially in the Old Continent.

Credit Suisse: victim of a massive and prolonged flight of deposits

Coinciding with the bankruptcies in the United States, Swiss giant Credit Suisse was rescued by its rival UBS, given the massive and prolonged flight of deposits that now created insurmountable liquidity problems. In fact, in the first three months of 2023, the Swiss bank saw $75 billion slip out of its coffers, which was added to the $121 billion withdrawn by clients in the final quarter of 2022. Credit Suisse’s problems were already known to market operators, and it was certainly nothing new that the bank could not recover from its dismal operating results. Actually, for 2022, Credit Suisse reported a loss of $8 billion. However, the special purpose acquisition by UBS did not magically solve all the problems left by Credit Suisse. Indeed, in June, UBS managed to obtain a loan of 5 billion Swiss franks from the Swiss government to cover Credit Suisse’s losses, but despite this, in early November, UBS reported a loss of US$785 million, partly due to Credit Suisse rescue costs, which amounted to 2 billion US dollars. Once the Swiss bank also raised the white flag, attention turned to another giant of the European banking sector, Deutsche Bank. The German bank never really recovered from the 2008 crisis, and in order to try to change the direction of its business, it carried out a long and painful restructuring that began in 2019 and was supposed to lead to a rebalancing of the books and new profits by 2022. Some of the stated goals were to restructure the corporate and investment banking divisions, revise targets for the minimum capital required to operate, and, last but not least, cut jobs.

Problems of the UK banking sector

Across the English Channel, the situation was certainly no rosier. In recent months, the British Central Bank has repeatedly changed its attitude towards the status of the national banking system. From “vigilant status” to “UK banks are resilient enough,” and at the end of October, it came to declarations stating that “despite optimism, new measures are needed to avoid the collapse of other banks.” These statements followed the crash of the stock market Metro Bank in early October and subsequent negotiations about its possible rescue, despite the fact that Metro Bank was not a systemic bank.

Bank Run

Whatever the economic or financial situation, as well as the risky or wrong choice that puts the bank on the brink of crisis, the trigger for the rapid bankruptcy of a credit institution is essentially the same. It is important to remember and emphasize that banking activities are carried out thanks to the ability to use the deposits of its clients at the discretion of the bank itself. The so-called bank run is nothing more than the result of a decline in customers’ confidence in their bank’s ability to manage the money given to it, coupled with the fear of losing all their savings.

The first real bank run occurred in 1866, when the English bank Overend, Gurney and Company, due to heavy losses associated with the collapse of railway share prices, was forced to suspend all its payments. However, perhaps the most famous bank run is the story from the 1964 Walt Disney film “Mary Poppins,” caused by the refusal of Mr. Banks’s son, Michael, to give his two pennies to the fiduciary Fidelity Bank, where his father worked.

Origins of banking crises are changing rapidly

However, the recipe for the 2008-2009 crisis differs from the 2023 crisis due to the “ingredients” provided by the macroeconomic context. When Lehman Brothers went bankrupt in 2008, the economy was already weak, and this put enormous pressure on the lending capacity of the banking sector, which in previous years had benefited from deregulatory reforms promoted by the administration of then-President George W. Bush. The modus operandi became more “casual” than what had happened in the past, and the problems of toxic loans increased dramatically when the economy entered a recession and no longer allowed loans to be issued without real guarantees. It is precisely because of the US “deregulation” in the early 2000s that even today the first solution that is proposed in moments of crisis is to reconsider the regulation of the banking sector, without paying due attention to the fact that the problems could possibly lie in monetary policy regulators themselves. In the recent past, the foundations for the deterioration of the banking sector were laid by the policies of low or zero interest rates, as well as all the expansionary monetary policy interventions of various central banks, which with their quantitative easing programs did nothing more than create a disproportionate amount of liquidity. In this regard, two statistics from the US banking sector are indicative:

  • Over the 2021-2022 biennium, as a result of the just mentioned monetary policy, according to the FDIC, there were no bankruptcies of credit institutions in the USA;
  • According to Reuters, the process of absorbing excess liquidity began to work only after November 9, 2023, when the Federal Reserve managed to bring reverse repo volumes below $1 trillion for the first time since late summer 2021, compared to $2.5 trillion in December 2022, signaling the actual reduction in liquidity.

The study by McKinsey on the situation with the global banking sector was called “The Great Banking Transition.” This report, dated October 10, 2023, discusses the light and shadows of the banking system, but the first data presented shows an estimate of ROE growth well above the 9% that was recorded on average between 2009 and 2023. Estimates also call for profits of $1.4 trillion for the current year. But then why have all the largest banks already announced thousands of layoffs? Wall Street alone has already cut about 20,000 jobs in 2023, with further cuts expected in 2024.

Perhaps these moves by banks signal that despite strong profit prospects, the banking sector is by no means in the best shape. Sooner or later, someone will have to pay the price for the monetary policies of central banks. Excess liquidity and, in some cases, even negative rates have led to global economies suffering from inflationary fever. According to the International Monetary Fund, in 2022, global inflation reached the level of 8.9%, while over the past twenty years the peak has been reached in 2008, at 6.36%. Central banks, the Federal Reserve (Fed), the European Central Bank (ECB), and the Bank of England (BoE), with the exception of the Bank of Japan (BoJ), believed that the most effective way to quickly combat inflation was to raise interest rates. The Fed raised the rate by 5 points, from 0.25% in 2022 to 5.25% in 2023; the ECB rate increased from 0.5% in 2022 to 4.5% in 2023; and finally, the Bank of England went from 0.5% in 2022 to 5.25% in 2023. It is easy to understand that the rise in US dollar, euro, and pound rates has also prompted other countries’ central banks to raise their own interest rates, so as not to bear more than necessary “export inflation” from the USA, Europe, and Great Britain. In fact, central banks have raised interest rates 54 times in 2022 in ten currencies most used in trading.

Central bank credibility hangs in the balance

The result was loss of confidence in the central banks themselves. The fight against inflation has produced modest results, and as if this was not enough, debate has begun to focus on the prospects for a recession in the global economy. The sudden rise in interest rates, while on the one hand intended to counteract the rapid rise in inflation, on the other hand tested the banking system, which had instead become accustomed to operating margins inflated by the low cost of monetary financing. In addition to the implications for the financial sector, central banks also underestimated the very dangerous possibility of runaway inflation and the adoption of interest rates significantly higher than those to which we are accustomed. The word that everyone whispers but no one wants to say is stagflation.

Central banks continue to use monetary policy tools to fix one problem while creating another, without listening to market signals. The mandate to keep inflation under control cannot be purely technical and cannot ignore sound economic policy, given the implications that monetary policy choices have for the real economy. Over the past decade, culminating with the 2020 pandemic, central banks have lost independence from their governments, which has consequently led them to assume social and political powers and responsibilities that were never the prerogative of central banks.


Riccardo Fallico