Finances in extreme tension: a multinational mega operation seeks to restore confidence and avoid a global banking crisis

Unlike the 2008/2009 crisis, this time it is a clear and classic crisis of confidence (REUTERS / Moritz Hager)

The reason for the existence of banks and the banking and financial systems is that money and credit –the “merchandise” that they multiply and offer– provide the functions of a medium of exchange in the economy at a lower cost than would otherwise be possible. if those entities and systems did not exist.

The downside of this cost reduction is that these are unstable institutions, because they are based on something as ethereal and potentially volatile as trust.

When there is trust, the system thrives; when it is missing, it shrinks and is in danger of disappearing. In turn, if confidence is excessive, it can encourage speculative booms that increase the possibility of losses, fraud and -finally- confidence crises. This is how the English economist saw it John Richard Hicks, one of the referents of monetary theory and economics, who pointed out that achieving a balance between both extremes required an attentive and highly efficient regulatory system. Something that is said easy and becomes difficult.

When there is trust, the system thrives; when it is missing, it shrinks and is in danger of disappearing

A little over a week ago, that balance was endangered in the US, due to the crisis that triggered the bankruptcy of Silicon Valley Bank (SVB), the sixteenth largest North American bank, and which led on Sunday, March 12, to a joint statement by the Federal Reserve (the American Central Bank), the Treasury and the Federal Deposit Insurance Corporation (FDIC, the federal guarantee agency, up to USD 250,000, of bank deposits) to issue a joint statement to avoid panic at the opening of the markets.

Before that, the FDIC had to take control of the bankrupt SVB, which in the previous week had been unable to cope with the withdrawal of funds from its clients, suddenly concerned about the quality of the entity’s balance sheet, affected by the problems of startups tech to which it lent and the increase in interest rates with which the Fed seeks to bring the US inflation rate (now at 6% per year) closer to its goal of 2% per year.

The goal was half achieved; another bank also fell, Signature, and fear spread in the following days to Europe, more precisely to Credit Suisse, an old Swiss banking house that in recent years has been involved in a series of scandals; The crisis precipitated when its main investor said it would not provide more funds, it was partially restored when the Swiss Central Bank and regulatory authority provided a credit line of USD 54,000 million, but it was definitely resented and forced, already this weekend , to frantic negotiations that led to its absorption at a liquidation price, in a hurry and with the intervention of official authorities in Switzerland, the US and the United Kingdom, by UBS, the largest Swiss bank, which agreed to gobble it up at a price of 60 % lower than the already depressed one that had closed last Friday.

Unlike the credit crunch subprime and mortgages and the bankruptcy of Lehman Brothers that triggered the 2008/2009 crisis, this time it is not about packages of poisoned assets distributed throughout the global financial system, but a clear and classic crisis of confidence, he said this Sunday Eric Parradochief economist of the Inter-American Development Bank (IDB), at the press conference that closed the entity’s Annual Assembly in Panama.

It all happened after a weekend of frantic negotiations to achieve not only that UBS buy the troubled Credit Suisse (REUTERS / Dado Ruvic / Illustration)

The operation this weekend to clear up the crisis of confidence was much broader than that of last Sunday. It was no longer cooked only between Washington and New York, but also involved the Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank (ECB) and the Swiss National Bank, which announced that they will offer so many operations of swap or currency swaps as needed to help foreign banks gain access to US dollar funding for one week through April. And instead of being weekly, those operations will be daily.

Everything to avoid new convulsions like those that have already led to the bankruptcy of SVB, Signature and the sale at auction prices of Credit Suisse.

The operation this weekend to winnow the crisis of confidence was much broader than that of last Sunday

Operations will be daily and will remain so until at least the end of April, the official entities said in a statement. It is about laying out a mega and multinational line of liquidity to the global financial system to reduce tensions, reassure spirits and, eventually, allay the fear of households and companies.

It all came after a weekend of frantic negotiations to get UBS to not only buy troubled Credit Suisse, but to do so as quickly as buying a candy bar at a newsstand. Because –the central banks calculated– the eventual bankruptcy of Credit Suisse and the trail of defaults that it would leave would entail a global “systemic risk”.

UBS will pay $3.23bn for Credit Suisse, whose market value was $8bn last Friday, but for which it had offered just $1bn. In addition, the Swiss government had to offer a guarantee of USD 9.750 million to UBS for possible “loss risks” in the Credit Suisse portfolio and the Swiss National Bank will make available, as another firewall line, a liquidity line of USD 100 billion more.

If it is an effective solution, it will not have been cheap. But much more expensive, they evaluated from the Swiss to the US Treasury Secretary, Janet Yellenand the President of the European Central Bank (and former Managing Director of the IMF), Christine Lagarde, it would be a global bank stampede. The arrangement will allow, Lagarde said, “to restore orderly market conditions” and “guarantee financial stability.”

Christine Lagarde, former head of the IMF and current president of the European Central Bank (REUTERS / Heiko Becker)

Unlike previous banking crises, where mistrust was precipitated by hidden losses, dubious assets, strange derivatives, the chain of events that led to this weekend’s tailspin began with losses at midsize US banks and then in the declaration of the largest investor in Credit Suisse that he would not put another dollar, euro or Swiss franc in the troubled bank, which in recent years has incurred all sorts of scandals.

The problem, he wrote in the Financial Times Jerome Legras, partner and head of research at Axiom Alternative, was that Credit Suisse had no longer lost just the trust of its shareholders or investors, but that of its clients. This made it the weakest link in the European banking system, despite having an abundance of capital and liquidity. But –of course– there is that question of trust, about which Hicks wrote and Parrado, the chief economist of the IDB, recalled today.

“In the end,” Legras wrote in the FT, “it was not the investors, but the clients” who decided the fate of Credit Suisse and – with additional prodding from the Swiss authorities and the main central banks of the world – threw it into the hands of the UBS arms.

Starting today, Monday, it will be seen whether the “confidence operation” was successful. As Hicks said, it’s a very delicate balance.

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