WirtschaftsWoche: Ms. Homölle, several American regional banks are bankrupt. In Europe, Credit Suisse (CS), a systemically important bank, collapsed within days. Would you have thought that possible after the financial crisis of 2008?
Susanne Homolle: Yes. Banks are commercial companies. And companies can make wrong decisions and get into trouble. The fact that we experienced a banking crisis with very special causes does not mean that we will not experience other banking crises with other causes or have just experienced them.
The crisis began in the US with the turmoil surrounding the Silicon Valley Bank (SVB). What was the problem?
The banks that are in crisis in the US are very special banks that are much less regulated than the big international banks. And they have very specific business models. The SVB collected funds that start-ups received from investors as deposits and invested them for the long term and actually very safely: in government bonds. But they are only supposedly safe. Because government bonds are relatively fail-safe, but not safe from interest rate risks. Because interest rates have risen, the value of bonds has fallen.
So far so good.
That wasn’t a problem at first. As long as I want to hold the bonds to the end, I get 100 percent back. But the rise in interest rates made it difficult for start-ups to find capital elsewhere.
To person
Susanne Homoelle is a professor of banking and finance at the University of Rostock and a member of the Volkswagen Bank Supervisory Board.
So they had to use their credit.
Exactly. They had to withdraw deposits, forcing the bank to sell those government bonds on their books that had fallen in value and realize what had been pure book losses to date. If I no longer have sufficient equity, I can no longer bear these losses.
After the fall of the SVB, the CS hit a systemically important major bank that did not have such problems. Was there a connection?
Maybe there was a connection because there was uncertainty in the market because of the SVB and he reacted more sensitively to negative news. But the CS is a different case. Here we have a bank that has been mismanaged for years. There were mistakes in risk management, compliance mistakes and ultimately also strategic mistakes. They probably stuck to investment banking for a very long time, where they did very risky transactions with sometimes high losses.
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Central banks and governments reacted quickly: CS was forcibly merged with UBS, and the government guaranteed deposits at US banks. Were these reactions correct?
What was really important and what was also learned from the 2008 financial crisis is that it is important to intervene quickly. That’s what you did. The fact that it is necessary can now also be seen in the USA. First Republic Bank is the next regional bank on the brink. You really do everything you can to restore trust: by limiting bets against this bank, for example, to prevent deposits being withdrawn. Ultimately, only politics with its might and power can do that.
However, the CS/UBS merger has made the “too big to fail” problem even worse: two large banks have become one very large bank.
I’m actually critical of that. I think there are two problems behind this: In Switzerland we have national banking supervision. Switzerland has a very great interest in rescuing its banks. So I assume that going forward she will do whatever it takes to always secure UBS. UBS is almost a state bank – in the sense of a state guarantee behind it. The second thing that I find frightening is that all major banks actually have recovery and development plans. The Swiss banking supervisory authority also has such a strategy. I ask myself: why wasn’t it implemented? This is a question that needs much more discussion now.
Is it at all possible to prevent crises like the ones we experienced recently?
No. Because we can’t predict everything. You can’t regulate everything ex ante, i.e. in advance. Regulation has grown exponentially in recent years. Many sensible measures have been taken. But banks are economically active companies, they make mistakes. Regulators make mistakes too. That’s why I believe that it can always happen that a bank gets into trouble.
This interview is a summary of the conversation with Susanne Homölle for the BörsenWoche podcast. You can listen to the entire episode here.
