In the globalized world, disruptions in the financial market indirectly affect everyone, including the local banking market in Serbia, economist Djordje Djukić told Beta today, regarding the sudden drop in liquidity of two banks in the USA and one in Switzerland.
“Regardless of the fact that European banks, which dominate in Serbia, are highly liquid, because the coverage of highly liquid assets is 150 percent, which is far above the minimum 100 percent, and the safety ‘level one capital’, in the form of ordinary shares (CET-1) is much higher and for the largest European banks it is an average of 15 percent, so it is three times higher than during the global financial crisis in 2008, which indicates that these fundamental factors are good, but what cannot be controlled in the economy is fear and panic reaction depositors,” said Djukic.
The American Bank of Silicon Valley (Silicon Valley Bank SVB) and the Swiss Credit Suisse became insolvent overnight last week due to a series of bad investment decisions and the fear of clients who withdrew their savings in a panic. SVB Bank is the 16th largest bank in the USA and has lent money to startups, and Kredi Suisse is the strongest bank in Switzerland.
Djukic said that the information that the Swiss National Bank intervened with 50 billion francs to save Credit Suisse only partially calmed the market, and the key question is what the European Central Bank (ECB) will do in terms of raising the interest rate.
All these disturbances, as he said, led to the expectations of market players that yesterday’s increase in the ECB’s interest rate would be less – by 25 basis points. According to him, this did not happen, so due to the high inflation rate of 8.5 percent in February 2023, the ECB still increased the key interest rate by 50 basis points.
“I have no illusions that inflation will be able to quickly fall to the target level of two percent, perhaps in 2025,” said Djukic.
He added that this indirect effect is very visible, where the slower increase in the interest rate of the ECB compared to the American Federal Reserve (FED), and all indicators show that the FED will continue with an aggressive increase in the interest rate, means that the dollar will strengthen and that all debtors in that currency will suffer the shocks of that effect “from the other side of the ocean”.
He said that generalizing the conclusions is pointless because individual banks are capitalized differently.
“I think that the monetary authorities must set criteria so that banks should be capitalized above average, and one of the mechanisms that I proposed, which was not adopted in Serbia, is to introduce a risk premium in the name of deposit insurance and that banks that are less capitalized, and meet the conditions for work, they pay a progressively higher premium for deposit insurance,” said Djukić.
This, according to him, favors the conservative management of banks, which take good care of unpredictable risks in conditions when panic can, regardless of sound fundamental factors, take its toll by forcing savers to increase savings deposits.
As he said, it must never be claimed that events on the other side of the Atlantic Ocean do not affect Serbia, they certainly affect through European banks, it’s just a matter of intensity.
That is why, as he assessed, preventive control of banks by the central bank, which has all the tools in its hands, is important, and by timely revealing the focus of illiquidity or lack of capital, shareholders can be required to recapitalize it, i.e. increase the capital base.
Djukić said that SVB Bank is a classic example of bad interest rate risk management and that preventive control by the regulator has completely failed.
He pointed out that the intervention of the FED and the Federal Deposit Insurance Corporation in SVB Bank was swift and successful and all depositors, not only those who are insured for $250,000 but also uninsured ones, can withdraw their deposits.
It was, as he said, a mini-crisis, but that the American authorities would not allow it to spread.
The change of Basel II (rules that allow banks to have a better insight into the risk), after the great financial crisis, was, as he estimated, aimed at preventing future crises from encroaching on budget funds to cover the losses of private institutions.
“The price of the bank crisis has to be paid by the shareholders, bondholders who were not aware of the risks, and at SVB and Credit Suisse, the regulators and preventive control failed,” Djukić said.
He added that the responsibility of bank management is extremely high, and that people take these functions lightly.
Bank managements should, as he said, confront shareholders when it comes to the race for profits and take care of defense mechanisms, including high liquidity, high capital base, high provisions for potential losses.
“It is not true that adapting to the Basel regulations automatically enables safe risk management, although Basel III was announced with pomp, which improved the regulation after the bitter experience of the global crisis, but we see that practice is ahead of the regulator and the regulator is often taken aback because it does not understand the processes and potential Risks at individual, primarily the largest banks, or bank management have a lack of knowledge,” said Djukić.
He pointed out that he has always opposed the principle of privatizing the extremely large profits of banks during the “boom” in the markets, and socializing their losses during the crisis.
He added that he is not sure that the taxpayers will not pay the price of the illiquidity of those banks even now, if there is not enough bankruptcy money, because SVB Bank has practically failed and will fall on the taxpayers since the US Ministry of Finance provided a fund to intervene in order to increase liquidity in to that private bank, created in the richest part of the USA, on the basis of powerful startup and hi-tech companies.
In the end, with the rise in interest rates, the price will be paid by new loan users, according to him.
The decline in the liquidity of that bank, as he said, was due to the unification of negative factors at one point, the FED drastically increasing interest rates, and that bank was buying high-quality bonds, and when depositors began to withdraw their deposits, it turned out that if the bank were to sell a portfolio of long-term government and other securities in order to record large losses, because the period of rising interest rates began and the bank found itself in the grip of interest rate risk and insolvency risk.
According to him, the bank’s assets are 200 billion dollars, which is not a large sum for the American financial system, but regardless, the stampede of deposit withdrawals demanded 40 billion dollars at one point.
“It is logical at this moment to expect the banks on the domestic market to refrain from further growth in credit placements. In such crises, banks calm down and wait for the market to stabilize,” Djukić said.