This article was originally published in The Spectator, 26/3/2023: https://www.spectator.co.uk/article/are-we-on-the-brink-of-another-bank…
After the collapse of Silicon Valley Bank and Credit Suisse drama, some investors are understandably asking if we’re on the brink of another 2008-style banking crisis. I’ve had an entire career in politics and government since that crash. Hard lessons have been learned and there can be no complacency – so often, trouble comes from areas we don’t expect. But we should also be careful not to ignore some of the key differences and underlying strengths in the current situation. Unfounded panics can become self-fulfilling. If we allow that, everyone other than a few lucky speculators will stand to lose out.
Credit Suisse was not typical: it had been an outlier for months. The rest of Europe’s banking sector is fundamentally strong: as shown by key indicators for capital, liquidity, profitability and asset quality. So why have their shares slumped? It’s down to sentiment. Buyers of financial securities have had their confidence knocked in the last two weeks and short sellers (investors that bet the price of a stock will go down) have tried to take advantage of this, with things stoked by social media. But for all the market wobbles, deposits across European banks have been stable. Those actually saving the money will know that the picture is very, very different to what it was pre-crash last time.
Europe’s banks are far better-regulated than they were 15 years ago. The amount of capital they are required to hold has doubled, or trebled. Loan books are much better funded these days, with average loan-deposit ratios well below 100 per cent in the UK and the Euro area; compared to peaks of around 130 per cent in the UK and 140 per cent in the Euro area. Liquidity coverage ratios (or LCRs: which require banks to keep enough high-quality liquid assets on hand so they can be sold in a high-stress scenario) is significantly higher – and well above regulatory requirements. In the UK, it’s more than 40 per cent above; in the Euro area, 60 per cent above. Silicon Valley Bank was not covered by LCRs. It’s a very different case.
But, you may ask, wasn’t the same said about the banks that ran into trouble in the past month? Weren’t they also seen to have a strong capital base and liquidity? This point ignores the stability of the deposit base. At Silicon Valley Bank, deposits were concentrated in a very narrow set of clients, nearly all with over $250,000 – so not protected by federal deposit insurance. Similarly, due to its wealth management business, many of Credit Suisse’s deposits were also not covered by deposit insurance. Significant amounts of money was taken out of the bank last year, before the turmoil this month. So Credit Suisse was more vulnerable when the US crisis hit confidence.
In contrast, deposits of UK and Euro area banks continued to grow into this year. Most European banks have a very different funding profile too, with their deposits spread in more diverse investments. This makes them less exposed to developments in specific industries, or decisions taken by a few individual clients. Sticky retail deposits, often well within the deposit insurance limit of £85,000 and €100,000 respectively, are typically the backbone of the UK and Eurozone deposit franchises.
Rising interest rates have generally helped Europe’s banks to greater profitability: as a sector, their profits are running at the highest in over 15 years. Each of the major UK banks have outperformed their continental European peers. Credit Suisse was the big outlier here, losing CHF3bn (£2.6bn) last year.
One final point. The Bank of England, the ECB and all G7 central banks now possess a vast arsenal of tools to protect the banking sector from financial shocks. Given what’s just happened to Credit Suisse, they won’t hesitate to use them if needed. Contingency plans will already be in place: coordinated liquidity measures, banning short selling, and unlimited deposit guarantees etc. Such firepower explains why confidence in the safety of European bank deposits is so high among analysts and investors.
When I was Chancellor, it seemed that interest rates would stay low for long. That has changed quite a lot – but as we survey the new landscape, our response should be driven by facts rather than fear. We have far better regulation, stronger capital and liquidity. Deposit bases are more diversified and central banks have more contingency plans to protect against financial shocks. All this makes UK and Eurozone banks – like Deutsche Bank – far more resilient than you might think. And that should give reassurance to anyone that depends on them: that is to say, all of us.
Sajid Javid MP is a former Chancellor of the Exchequer and Deutsche Bank executive.