1. Origins and limits of the Western banking crisis

Everything is inside. The Credit Suisse affair, the Svb meltdown, First Republic Bank’s hemorrhaging of liquidity, the real estate crisis linked to the low-income assets of the U.S. regional banks that fodder it, the mirror-neuron-style fall of European stock markets, the runaway delirium of account holders, and a thousand other, real or fake, true or exaggerated factors repurpose not the explosive subprime cocktail of fifteen years ago, but a poisonous potion from which to steer clear: its active ingredient is not progressive mithridatization (drink it little by little and you will be saved) but lethal intoxication, the liquid proof of which is the schizophrenic panic that has descended on Western banking systems in less than four months since early 2023, the exact opposite of what happened at the outbreak of the Russian-Ukrainian conflict over a year ago. Undoubtedly no one could have expected such a brutal shift in central banks’ expansionary policy, but two easy prophecies could have seen anyone a good prescient. The first: years of rock-bottom rates had long bred a vicious inflationary spiral and sustained an unprecedented housing bubble. The second: the cakewalk would not last.

One could speculate at length about events, causes, concomitants, errors (and remedies worse than these): lax bank capital requirements in the U.S. and too-weak deposit coverages in the EU, misalignment between assets at pitiful rates (including multi-year mortgages granted to prime customers at insignificant rates) and failure to offset new assets at bullish rates (read: financial inflation cumulating with economic inflation but not centering bank breakeven in asset appreciation), inadequate risk management or perhaps unheeded by overly greedy properties, abstract construction of a future as green and inclusive as it is utopian in lieu of allocating some of the funds resumed to energy and logistics inflationary counteracting that would have prevented or dampened it. On top of it all, then, this perennial silliness of contagion, which, on closer inspection, is just the siren-chant activated by a small handful of market movers to ride the wave and play against the trend, increase the murk by extracting huge masses of liquidity from savers and competitors (by the way, where has market rigging gone? Nobody knows).

2. A streamlined analysis

In such cases rereading the near past is a sterile and depressing exercise, because the real question is another: what has been missing and is really missing? The best blacksmithing, that which goes by the name of reason.

A realistically rational analysis leads to the conclusion that, except in extreme cases of genuine mala gestio, it was entirely inevitable that banking assets (the normal ones, not the opaque ones of any time) based on low rates would experience a nominal fall at a rocket rise in official rates. Who in a few months could move billions from low-yielding securities to reinvest in more lucrative securities without consolidating huge losses that could not be offset in the short term? Which is not to say that this cannot happen in the medium term through gradual and, indeed, rational replacement. Evidence of this is the performance of U.S. money market funds (Mmf) that, by investing in short-term government bonds, are able to reposition themselves more quickly: after draining runaway liquidity of more than $ 5 trillion, yielding an average of 4 percent, they recorded their first minus sign ($60 bn) in mid-April, a sign that points to reasonable calm in the conduct of depositors. Yes, calm would be the second buzzword, certainly not aided by algorithmic high frequency trading and fire-breathing blogs and social media (again: where has market abuse gone? Sorry, I forgot, net is untouchable …).

3. The SSM’s choice

Talking about calm, a good example comes from statements made, on April 25, by Andrea Enria, head of the European Unified Banking Supervisory System (Ssm). In the run-up to the stress tests at the end of the year, the Ssm called for a specific (in jargon: granular) in-depth study of European banks’ assets, especially of held-to-maturity securities, whose nominal devaluation could be in the immediate term even not exactly insignificant (we are talking about some 3 trillion euros of face value). Quite right. Supervision has to be vigilant, so this slide smear is legitimate and appropriate, especially if accompanied by the no less concrete message with which Enria, one who has a lot of reason, clarified that the impact of rates remains positive for EU banks. The hope is that news of the outcomes will be similarly accompanied by a downsizing of the problem. Can you imagine what would happen if, instead of focusing on fundamentals tightness, everything translated into dramatizing nominal devaluation?

Henri Frédéric Amiel, a brilliant, then undervalued author, wrote in 1871: “The worship of appearances is paid for”. He had a habit of reasoning.

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[1] Managing Partner, Studio Ghidini, Girino & Associati – Thomson Reuters Stand-out Lawyer 2023