When six central banks in the world’s largest economies decide to coordinate statements to reassure financial markets, it is normal to conclude that something is wrong in the global banking industry.
What started as a failure of a US regional bank that had not sufficiently managed its interest rate risks soon became a crisis of investors’ confidence in European banking giants like Credit Suisse and Deutsche Bank.
So how bad is the lingering global banking crisis?
On the home front, it seems that the Maltese banks’ conservative banking models that rely primarily on retail deposits to finance their lending will serve them well to avoid any significant loss of confidence from their depositors.
Rating agency Fitch believes Maltese banks do not appear to be at immediate risk from recent international turmoil. Fitch’s latest report describes the Maltese banks’ liquidity levels as “exceptionally strong”.
However, Malta’s open economy inevitably makes it vulnerable to global headwinds that could affect the local economy. So far, international financial markets appear to have regained some composure after weeks of turmoil and lingering distrust of some investors in the banking industry.
While some fear a repeat of the 2008 global financial crisis, banks today are better prepared for adverse economic developments that could affect their stability. Regulators insist on more robust capital bases and more effective risk management. Moreover, central banks’ assurance that they will intervene as much as is needed to support the liquidity of well-managed banks should be enough to put investors’ minds at ease.
Still, discarding less optimistic scenarios for the future direction of markets would be imprudent.
If interest rates continue to rise, there is a risk that some weaker banks may fail. Other banks will become more risk-averse and less likely to lend to smaller businesses. This could hurt economic activity and lead to a higher number of defaults.
Shifting credit risk to the capital market investors will never be the ideal solution for banks’ loss of appetite for riskier lending.
Regulators have the difficult task of balancing the risks of raising interest rates to curb inflation or leaving them at the present levels to avoid a deep recession that would undoubtedly make the situation of some global banks more depressing.
Banks have gotten used to years of low-cost borrowing due to a regime of ultra-low interest rates maintained by central banks worldwide. The sudden rate increases create severe challenges for some banks to manage their portfolios.
The global banking crisis is likely to linger for some time and it is difficult to predict what turn it will take in the coming months. There are too many moving parts and risks that are beyond the control of regulators and policymakers. Few financial crises have the exact root causes as previous ones.
The seed of the next crisis is often hidden from the eyes of those responsible for keeping the financial plumbing in a good state of repair.
Professional investors critically analyse how every bank is managed. The fall of Credit Suisse, for instance, was predicted by some analysts who observed the bank’s accounting errors, its involvement in multiple scandals, billions in losses and several failed turnaround plans.
One reassuring reality is that central bankers today are more prepared and determined than ever before to do whatever it takes to ensure financial system stability.