Editorial | Global banking rules for a globalised financial system

The failure of Silicon Valley Bank in the US justifiably set off alarm bells to all those who remember the financial crisis of 2008.

Back then it was the failure of two US banks that kicked off a crisis of global proportions that saw long-established financial institutions dropping down like dominos.

The aftermath was painful as ordinary people lost their life savings. To make matters worse, government interventions to save banks deemed too big to fail created a sovereign debt crisis that forced governments to impose harsh austerity.

European countries like Greece and Ireland buckled and the fear of wider contagion risked undermining the very existence of the Euro.

The effects of that crisis kept being felt for years, which is why the sudden demise of SVB and two other US regional banks, Signature Bank and Silvergate Bank, set off the alarm bells. The subsequent failure of Credit Suisse in Switzerland just made matters worse, given the size of the bank.

Regulators in Europe and elsewhere remain optimistic that what is happening today will not be a repeat of the 2008 crisis.

At European level, the tough regulatory regimes introduced in the aftermath of 2008 to avert a repeat of the crash were never relaxed unlike in the US where smaller regional banks were given some reprieve.

So far, despite market jitters, the situation remains under control. Governments were also quick to react to developments to minimise the risk of contagion, protect depositors and safeguard taxpayers from having to prop up the ailing banks.

On the domestic front, the major commercial banks remain well capitalised and are unscathed by the SVB and Credit Suisse failures.

The European Commission has also been cavalier about the situation, insisting that the European banking system is stable.

Even so, it is worth noting the words of European Commissioner for Financial Services Mairead McGuinness to the European Parliament last week. He dwelt on the importance of learning lessons from these failures in the US.

The US banks were not subject to strict regulatory requirements for liquidity because the US does not apply Basel to midsized and smaller banks. In the European Union, the Basel Prudential Standards apply to all banks.

The Basel prudential standards introduce a layer of caution into the prudential regulation and supervision of the EU banking sector, including liquidity risks, interest rate risk and the need to cover unrealised losses on bond portfolios with capital.

McGuinness said EU supervisory authorities are closely monitoring recent changes in interest rate risk and liquidity conditions, including possible contagion risks, at the level of banks and the system level.

But he did raise the point on how SVB, which was less onerously regulated in the US, could have expanded to other European countries, even if these branches and offices were not deemed to be of critical importance.

He argued that Basel standards should apply on internationally active banks.

In an interconnected global financial system banking governance has to be of a global nature lest the lessons of 2008 are forgotten.

The SVB failure illustrates the importance of a strong and operational crisis management framework that includes the appropriate tools for dealing with all banks in trouble. The importance of robust crisis management and a deposit insurance framework cannot be underestimated.

The EU must also ensure that the tough rules it applies on all banks are also applicable to European branches of third country institutions. This is not only a question of fairness but more importantly one of financial stability and depositor confidence.