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‘Never again’, that was the idea after the banking crisis in 2008. And yet we find ourselves in another crisis. Assistant Professor Edoardo Martino looks at the pain points in the regulation. ‘We did make improvements, but we still have a long way to go.’
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Last month the Sillicon Valley Bank collapsed in the United States, along with the smaller Signature Bank and First Republic. In Europe Credit Suisse got in trouble. ‘There have been shocks that hit the economy: the war in Ukraine and the inflation’, Martino explains. ‘Banks had to rebunk this inflation, that’s standard policy. The idea of banking is that you factor these risks in, but the Sillicon Valley Bank didn’t. That’s a rookie mistake. Their losses became known, wealthy start-up founders and venture capitalist withdrew their money and the bank collapsed.’

Domino effect

After these first domino stones start to topple, others quickly follow. ‘Once things start to go wrong, other things also go wrong. Credit Swiss was already known to be a troubled bank: they had bad management and financial problems.’ There was no panic yet, but that changed after Sillicon Valley collapsed. People wondered: Will Credit Swiss be next?

On 15 March the Swiss National Bank issued a statement saying Credit Swiss was alright and, should they need liquidity assistance, this would be provided. ‘The message being: don’t withdraw your money and don’t distrust the bank. But that wasn’t enough. On 19 March the bank was sold to UBS, the largest Swiss bank. It did stay in the market, avoiding yet another bail-out.’

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Banking is a game of trust. But it becomes a problem when you fail to take necessary actions.

Balance trust

The ‘everything is alright' statement is no exception in the banking world. ‘Understandably so’, says Martino. ‘Banking is a game of trust. But it becomes a problem when you keep upholding that message and fail to take necessary actions. The problems can pile up and you may end up with a big crisis. The bank can eventually end up in public hands and then it is very difficult to put it back in the market, as happened with ABN AMBRO in the Netherlands.’

‘If you keep saying everything is fine, people might trust you longer. But the breach of trust is even bigger when you end up with a crisis. This doesn’t mean you need to wave a red flag for every problem, because some problems can be solved outside of public. Regulators are not blind or in bad faith. It’s just a difficult business. But we do need better regulation. The current system allows early measures, but it doesn’t provide the regulators incentives to do so. That’s what’s lacking.’

Should we expect a big banking crisis in Europe again? ‘All together, we are better equipped than 5 years ago. I don’t see the current situation leading to a big crisis in the EU, but it’s clear that there is room for improvement.’