According to authorities and regulators, until last weekend Credit Suisse was a solvent bank, but on Sunday it had to be rescued using gigantic guarantees from the Swiss state. German Chancellor Olaf Scholz has already said that Deutsche Bank was a profitable and solvent bank. We will see.
What is happening these days is very reminiscent of what happened in the great financial crisis of 2008. Investors distrust banks, they doubt each other, governments assure that they are solvent. But the markets punish the prices until they are so low that they make the position of the attacker untenable.
It is true that there are many things that are different, although it remains to be seen if enough to rule out a serious financial crisis. In 2008, the financial bubble was embedded in the heart of the economy, the real estate sector. The dance on the edge of the precipice, until falling on the wrong side, between finance and the brick caused the disaster. Now, it might seem that financial ambition has danced alone with itself, if cryptocurrencies are excluded, almost a congenital prolongation, were it not for the not insignificant issue of public debt, which some have stored up to indigestion.
The deep mistrust of the soundness of the banking system is repeated. But with a hypertrophied financial system, excessively large for the economy and so dangerous that if any of its small links, starting with a midsize US bank, are dropped, catastrophe can be unleashed.
Despite the promises of public officials, shadow banking - non-bank operators, from funds of all kinds to collective investors, parallel markets, financial product insurers, credit intermediaries... -, mostly unregulated and daughter from the search by banks for returns beyond their balance sheets, has grown exponentially since the great crisis of 2008. Then it totaled 100 trillion dollars; at the end of 2021, it already reached 240 billion. Banking is simply the visible part of the iceberg.
In recent months, the crisis of confidence began with private pension funds in the UK, continued with Silicon Valley Bank in the US and rose to the heights with Credit Suisse. On Friday it took a new leap, not in size but in scale, with the contagion to Deutsche Bank. And we must remember, another disturbing similarity, that in 2008 the crisis reached Europe due to doubts about German banks, choking on subprimes. Now, as then, it continues to be a sinkhole of unknowns about its situation and solvency; Deutsche Bank may be the first piece.
Fear moves at breakneck, digital speed, higher than in 2008. Panics, money withdrawals, are executed by pressing a key. Quick and without notice. As was verified in Catalonia, always a pioneer, the week of October 1, 2017, when CaixaBank and Sabadell had to change headquarters at lightning speed to stop the bleeding. It is mobile money, a new headache for financial stability.
The current crisis of confidence no longer assesses the positive effect for banks of interest rate rises (they earn more money with each more expensive loan they grant). Investors and markets emphasize the credit restriction, already present. The banks contract their activity and the most expensive credit increases the possibility that the client will have problems to return it. The economic slowdown, partly due to these increases in interest rates, heralds future delinquencies.
The conclusion of investors is that politicians like photography –the fixed one offered by bank balance sheets– while they watch movies –in which the important thing is not the present moment, but the end of the story–. And they think that the banks are on the way to adding to their current risk situation due to the rise in interest rates (which devalues the value of their assets, such as the public debt hoarded during the years of negative rates, and makes their liabilities more expensive, the customers ask for more to deposit their money) another credit, in which the health of their investments will worsen. Perfect storm.
It is not only the economy that suffers, reducing activity and generating more unemployment, when interest rates rise. The world financial system has profound difficulties in adapting to these increases. There were already previous tests of the central banks finally aborted. The big banks are entangled in a gigantic galaxy of speculative operations and crossed debts, which in the event of problems rebound as defaults in any economic sector and in the most remote parts of the planet.
Where will the current confidence crisis evolve? If the tension continues, the banks will suffer a lot, even if according to legal and regulatory standards they are very solvent, as is the case of the Spanish. No bank resists that the value of its share be pulverized, it will require urgent assistance.
If the pressure continues, the problem will move from the banks to the states. Switzerland, which had to change its most sacred laws to get out of trouble, leads the way. Deutsche Bank, despite its problems, has behind it the German state, the leading power in the eurozone, a world champion. Its public debt is around 70% of gross domestic product, what the economy produces in a year. That of Spain is 116%.
How long will central banks keep raising interest rates? Difficult dilemma for the leadership of the European Central Bank (ECB), headed by Christine Lagarde and Luis de Guindos, but also by Joachim Nagel, president of the German Bundesbank, who wants to continue. In the end, despite what Lagarde said, financial stability and monetary policy go through different channels and use different tools, until reality brings them to the same ground.
