The virulent market shocks in the aftermath of the Silicon Valley Bank (SVB) collapse and Credit Suisse’s troubles have brought to mind the 2008 subprime mortgage explosion in America, which plunged economies into the biggest crisis since World War II. World War. There are specific similarities and nothing resembles the root of the problem because today, above all, banking is strengthened and healthy, although supervisors will have to play a vital role to clear up doubts as soon as possible and prevent hysteria from ending up making a dent.
“The key is to make this crisis temporary. If we have a temporary crisis, it will not have any relevant macro impact or anything. If the crisis ends up being less transitory, then of course, we have a problem there! because, if the rise in interest rates is added to this situation of uncertainty, the banks will not lend, and we would enter into a perverse dynamic that must be avoided at all costs”, reflects Antonio Carrascos, who lived through the financial crisis of 2008 from various responsibilities such as president of the Frob and counselor of the Single Resolution Board (JUR).
Subprimes were a type of high-risk mortgage, granted in the US to clients with low solvency, which were packaged and sold as bonds with very high returns. The rise in rates by the Fed triggered their delinquencies and they exploded in the balance sheets of the banks, many European and none Spanish. In Spain there was no direct exposure, but the Spanish economy and banking suffered one of the biggest corrections, forcing the intervention of entities and the reconversion of savings banks, because its detonation contaminated international financial markets, truncated the economies and here A real estate bubble ended up being punctured, which overflowed the entities’ balance sheets with toxic assets.
Looking for parallels, the main one is “the mismanagement of the Lehman Brothers crisis”, which sparked panic. “That bad signal that the United States Government had given by letting Lehman fall spread the problem to the whole world and here it has been something similar,” he repairs. In the fall of the SVB and the situation of Credit Suisse coincides the poor management of its administrators of some problems that are aggravated by the massive leaks of deposits when fear is installed among its clientele, but, unlike the subprime, the deposits fly to other entities without having anything to do with contamination of junk mortgages. There is no hole with that movement but liquidity transfers. “This crisis has nothing to do with that of Lehman with respect to the origin. In fact, in that sense it is more similar to that of 1994, which also originated from a rise in interest rates,” financial sources point out. “It is true that we are experiencing a nervousness in the markets that, given the change that has occurred in the last 15 years at a social level, can be understood. The truth is that at a technical level there is no uncertainty in credit risk or in the valuation of the assets of the portfolios and that is key to see what is going to happen next”, specifies a banker.
“The situation is different. The default is contained because companies and families are much less indebted and indebtedness is one of the key variables in the delinquency boom. Then the indebtedness was 236% and now it is at 151.9%”, explains the partner of the PwC Financial Regulation and Risk Unit, Santiago Martínez-Pinna. “In addition, now European banks have almost triple the capital than in 2007. Then they had a requirement of 8% and now they are at 21.9%. In CET 1, it goes from 2.67% to 10.8%,” he adds. “There is no objective data on capital, liquidity, exposure to fixed income, etc., that minimally supports this punishment on the stock market. Here we are facing a situation of uncertainty unrelated to the real situation of the banks,” agrees Carrascosa.
Banking fundamentals are strong but lingering doubts can dent credit
In financial institutions banks and as explained by the banking partner of the consulting firm Accuracy, Enrique Reina, the most usual problems are unleashed by a bank panic as a result of a decrease in the value of the assets that causes a deterioration of capital or if it is installed a strong distrust in the entity. The Californian bank of technology companies SVB would fit in the first case and Credit Suisse in the second. “The curious thing is that, if the market perception is that the entity is insolvent, this will be enough to unleash that panic and we will be facing a self-fulfilling prophecy scenario (CS can be framed here)”, he indicates.
Unlike 2008, supervisors face the challenge of managing doubts with a strengthened bank thanks to the regulations that were approved to avoid a repetition of that situation. “The authorities were not prepared for a problem of this magnitude and acted hesitantly and uncoordinated at first: we have seen that this is not the case today,” says Reina. Among the strengths of the current scenario, he highlights the solvency of banks and their comfortable liquidity piggy banks or that there are even protocols on how to act if necessary. “Today, banks have recovery and resolution plans to try to tackle liquidity and solvency problems early. In the event of bankruptcy, this will also be planned avoiding public bailouts, see in Europe the creation of the single resolution mechanism that managed the bankruptcy of Popular”, he illustrates.
All in all, the reality is that the SVB episode has brought to the fore the risk that rate hikes entail for banks’ investment and balance sheet management. The recommendations of the PwC partner go through managing the financing properly now that the free bar of the TLTROs has ended, analyzing the credits and debug loans, especially in the case of refinancing and reflect on the usefulness of certain internal models. For the former president of Frob, the key is to solve the problem (SVB and Credit Suisse), something that the US and Swiss authorities have focused on in recent days, and the analysis by all supervisors of the vulnerabilities to rate hikes and demand measures from entities if they observe any problems (the ECB carried out a stress test at the end of 2022 and yesterday assured that there is no drop in deposits and the contagion to Credit Suisse is “immaterial”). “It is essential to give clear and unequivocal signals that there are no problems in the fixed income portfolio, in arrears, in the links with entities that are having a bad situation… And with that we must try to restore tranquility and financial stability and from there it would be a return to the monetary policy that tries to control inflation,” he said.
The difficult handling of rates to lower prices without puncturing bubbles
Monetary policy is a powerful weapon to inject cheap financing when it is necessary to reactivate an economy or cool it down, with the drain of liquidity via rising interest rates, if runaway inflation represents a threat. Its ability to change the rhythms and directions of the activity is as strong as it is difficult to handle without damaging something along the way. History leaves some crises that exploded or accelerated when interest rates rose because bubbles existed. An example is the American subprime, which exploded when defaults on subprime mortgages spread as financing became more expensive due to having been granted to poorly solvent clients and exploded on the balance sheets of the entities that bought their securitizations. In Spain, the translation of that crisis punctured the real estate boom (another bubble) in the banking pipes. The current steep rises depreciated the value of SVB’s investment, but the big mistake is that this bank mismanaged risk and lacked hedges.
