Western banks leave crisis-stricken year behind

BRUSSELS

US bank failures and the collapse of Credit Suisse caused uncertainty and anxiety in the European banking system in 2023, highlighting the need for new measures to make the sector more resilient.

The bank crisis in the US in March ensued the Credit Suisse panic in Europe, raising questions about the risk status of banks operating in EU countries.

The collapses underlined the vulnerabilities of the sector, making it clear to what extent banks are interdependent and fragile in the global financial system.

High interest rates caused banks to fail in US

News of failures concerned global markets at a time when interest rate hikes continued in the face of high inflation and recession expectations increased.

Silicon Valley Bank (SVB), focusing on the technology sector and ranking as the 16th largest bank in the US with total assets of $209 billion, filed for bankruptcy March 10 due to rising interest rates and a slowdown in the sector, attracting attention.

Signature Bank, the 43rd largest bank in the US with $110 billion in assets, specializing in crypto trading, went bankrupt March 10, due to rising interest rates and a decline in the cryptocurrency market.

First Republic Bank, ranking 46th in the US with $100 billion in assets, often providing private banking services to wealthy clients, went bankrupt due to rising interest rates and concerns about an economic recession March 13.

The failures fueled uncertainties and insecurities in the global economy.

US crisis migrated to Europe through Credit Suisse

Credit Suisse, Switzerland’s second-largest bank, was hit by losses on risky loans and increased competition in the sector, raising fears of a global banking crisis.

Credit Suisse's largest shareholder for 167 years announced it will not raise capital, causing a rapid decline in the bank's share price and selling pressure on bank shares spread across the market.

Credit Suisse announced it would borrow more than $50 billion to overcome the crisis, however, it was not enough to overcome panic in the market. As a result, Switzerland's largest bank, UBS, agreed to buy Credit Suisse for $3.8 billion on March 19, making it the largest acquisition in the country's banking history.

In light of these developments, sales deepened in equity markets across the world, while demand for bonds from safe-haven assets climbed despite ongoing inflation concerns.

Germany’s 10-year bond yield fell 85 basis points and tested 1.92% on March 20, while it completed the month at 2.3% as the crisis over banks was overcome.

Switzerland’s 10-year bond yield also went from 1.6% to 0.89%.

Strengthening banking union on top of agenda

EU officials pointed out that the change and increase in interest rates created a new environment in their assessment of the banking crisis.

They highlighted the need to be on alert in the new environment, noting that inflation and rising interest rates pose different challenges to financial stability than prolonged low-interest rates.

Leaders of EU member states held the Euro Summit on Oct. 27 to discuss developments in the banking sector, during which they said:

“The EU banking sector is resilient, with strong capital and liquidity positions, and the banking union has significantly strengthened the resilience of the banking system.”

The need to strengthen the banking union, one of the EU's projects aimed at making banks more resilient to shocks and creating a single market in the area, moved to the top of the agenda with new measures.

*Writing by Emir Yildirim