[NEWS] - 4 lessons from the global banking crisis

Timely interventions also averted the full-blown financial crisis that was likely to follow the collapse of a series of global banks more than a month ago. Four key lessons can be learned:

Crises are different

The current crisis did not start with credit risks, but also interest rate risks that caused banks to plunge in March 2023. For a long time, interest rates are at their lowest, banks customers have accumulated long-term bonds to be able to generate income. They pay attention to credit quality but don’t expect bond portfolios to also suffer huge losses if central banks tighten monetary policy.

Policymakers have announced that interest rates will rise quickly but some institutions are simply not prepared for the higher interest rate environment.

In its Global Financial Stability Report released on April 11, 2023, the International Monetary Fund estimated: “The impact of unrealized losses in portfolios held to date Maturity for mid-tier banks in Europe, Japan, and emerging markets is likely to be moderate, although the impact on some other banks may be more pronounced.”

Digital banking brings unexpected consequences: Increased risk of banking disturbances

This is also evident in recent banking problems exacerbated by the impact of social media and digital banking. Rumors spread at the speed of wildfires on social media, causing customers to panic and withdraw deposits estimated to be worth billions of dollars, with just a few taps on their smartphones.

The panic was so intense that customers withdrew $42 billion from SVB (USA) on March 9, making it impossible for SVB to respond. Credit Suisse (Switzerland) also experienced a huge drop in deposits. Regulators must still be ready to act quickly and decisively to restore market confidence in order to prevent panic from spreading.

Vietnam has become a prime example of how to handle deposit crises. Last October, Saigon Commercial Joint Stock Bank (SCB) faced a wave of massive withdrawals. However, the State Bank (SBV) intervened as well as handled the situation quickly, pledging to depositors that their savings would be guaranteed and quickly restored when the market order was restored. This intervention proves that the SBV is very well prepared to contain sudden waves of panic, providing much-needed reassurance to customers and investors.

Be prepared for possible crises due to the sudden increase in inflation

In our country, the inflation rate has slowed down to about 3.55% in March 2023, much lower than the SBV’s forecast of about 4.5%. This has encouraged the SBV to lower the preparatory refinancing rate to 50 basis points, from 6% to 5.5% at the end of March. This is also the second rate cut in a month.

However, with inflation rising unexpectedly comes the threat. Geopolitical tensions could send commodity prices soaring again, leading to a spike in inflation. Fortunately, central banks now know how to deal with these real challenges in order to minimize the impact.

In the past, central banks have often cut interest rates to address banking turmoil, thereby sacrificing their goal of reducing inflation, but are now not doing so. The European Central Bank managed to raise its policy rate by 50 basis points on March 16, despite the banking turmoil. Days later, the US Federal Reserve (Fed) raised the fund’s interest rate target by 25 basis points, ignoring concerns about the effect on the banking system.

The SBV should consider developing similar measures, including new tools that can support the bank and at the same time deal with inflation.

Banks are too fragile, unstable

Supervisors have done many things to strengthen banking supervision, such as requiring banks to reserve more capital, larger liquidity buffers, and regular checks and balances. Banking supervisors were well prepared to intervene quickly to protect deposits, bail out shareholders and impose merger requirements with many other institutions. All in just a few days and can be back up and running just after the weekend.

However, the events taking place in March, it has shown that the risk of a banking crisis is still possible, with the impact of disturbing the sustainable prosperity of countries, especially more is a country that is striving for rapid and balanced economic growth like Vietnam

Although banks are playing an important role in mediating savings and investments, they do not provide adequate protection for citizens’ savings. Too many banks still suffer from poor management and will have to take on undue risk when using customer deposits for investment purposes.

Therefore, it is time to consider a new financial system to provide simpler, but more prudent, more stable banking services with commercial payments and better protection of your savings depositors, separate from the more volatile and risky financial markets.

With the economic situation falling into crisis, the collapse of US banks has easily seen the crisis level of the world economic market. Besides, some small and medium enterprises are also facing many difficulties in getting loans. Indochina Holding specializes in providing financial consulting services and supporting loans from funds with the lowest interest rates. At the same time, supporting small and medium enterprises with effective investment and business strategies.

Hoang Yen (Collection source)