Bank crashes won't turn into repeat of 2008 crisis, says expert

This photo taken on March 25, 2023 shows a Deutsche Bank branch in Berlin, Germany. (Xinhua/Ren Pengfei)

In Europe, Credit Suisse, the second largest bank in Switzerland, was taken over by Swiss banking giant UBS due to a liquidity crisis and market volatility. Also in March, the share prices of Germany's biggest lender Deutsche Bank plunged as concerns about the health of European banks were mounting.

LONDON, April 5 (Xinhua) -- The problems that hit Silicon Valley Bank (SVB) in the United States (U.S.) and Credit Suisse in Europe will not lead to a repeat of the 2008 financial crisis, a leading political and financial expert at the London School of Economics and Political Science (LSE) told Xinhua in an interview.

Professor Iain Begg, co-director of the Dahrendorf Forum, a joint initiative between the LSE and the Hertie School in Berlin, was commenting on the recent turmoil in the banking sector on both sides of the Atlantic.

Asked about the root cause of the recent problems in Europe, Begg said: "The European banking crisis has a number of causes. One is the impact of the increase in interest rates, which caught out those banks that had a relatively high holding of bonds."

When interest rates go up, bond prices go down. The inverse relationship has hit SVB very hard and also affected both Credit Suisse and Deutsche Bank in Europe, the professor said.

People queue up outside the headquarters of the Silicon Valley Bank (SVB) in Santa Clara, California, the United States, March 13, 2023. (Photo by Li Jianguo/Xinhua)

Begg said that he does not see any real chance of a major financial crisis as the banks in Europe are much better capitalized and closely watched by regulators than they were 15 years ago.

In early March, SVB, the 16th largest bank in the U.S., was closed by regulators, marking the second largest bank failure in U.S. history. The tech-focused lender was loaded with long-term bonds as it bet on interest rates staying low. However, the U.S. Federal Reserve hiked up rates by 450 basis points in a year to deal with surging inflation.

In Europe, Credit Suisse, the second largest bank in Switzerland, was taken over by Swiss banking giant UBS due to a liquidity crisis and market volatility. Also in March, the share prices of Germany's biggest lender Deutsche Bank plunged as concerns about the health of European banks were mounting.

"There is a difference, though, which is that Deutsche Bank on most accounts is a well-run bank," Begg said. "It has recovered from its difficulties over 15 years ago, whereas with Credit Suisse the suspicion is that the management had been poor, and that contributed to the slide in the share price and eventually to the takeover by UBS."

Discussing the differences between the developments in Europe and the U.S., Begg said the U.S. banking crisis was predominantly caused by a number of second-tier banks, whereas in Europe both Credit Suisse and Deutsche Bank are the sort of banks that could topple the system.

"That's the reason that the Swiss authorities were quick to act to find a way of resolving the Credit Suisse problem," Begg said.

Photo taken on March 16, 2023 shows a signage of Credit Suisse in Geneva, Switzerland. (Xinhua/Lian Yi)

Calling the failure of Credit Suisse a particular case, Begg said he does not see any further contagion to other banks.

There may be vulnerabilities to the rise in interest rates if it continues, but the banks in Europe nowadays do not face the same kind of threats with unknown quantities in their asset base that they had during the global financial crisis in 2008, Begg said.