The renewed bank sector turmoil evokes unpleasant memories of the 2008 crash, which ultimately cost Irish taxpayers about €45bn. We simply cannot take it for granted that this time things will be different. The lessons of our most recent banking crisis must be kept uppermost in decision-makers’ and regulators’ minds.
omorrow Taoiseach Leo Varadkar travels to a two-day EU leaders’ summit in Brussels, with talks taking place in the shadow of faltering banks in the US and a seismic emergency restructuring of the Swiss bank system in the wake of the crisis at Credit Suisse. We trust that the Taoiseach and his advisers are not lulled into a false sense of security by the abundant messaging that “all will be well”.
True, at this point and taken in round, Irish banks are not in the line of fire. They are better insulated thanks to measures such as the Central Bank mortgage rules and other blocks on risky lending. But we can never forget that the famously open Irish economy is vulnerable to any significant global slowdown. That means current bank travails do amount to a risk for all of us.
A global financial shock is also bad news for housing, already the major issue. Builders and developers became less reliant on traditional banks after the crash, but Irish construction did become more dependent on potentially flighty overseas investment.
The fallout from Credit Suisse, a 167-year-old household name from a country seen as a synonym for banking rectitude, has been considerable. Resultant anxiety about contagion has happily receded after UBS’s 11th-hour takeover, led by Corkman Colm Kelleher.
The mood at EU level improved greatly as a result of this hasty and enforced marriage of the two Swiss institutions. The takeover removed much tension from money markets also assuaged by the prospect of extra liquidity, and a potential slowdown in interest rate hikes, both courtesy of the European Central Bank ( ECB).
EU regulators and politicians promptly insisted that the fundamentals of European banks remained healthy – a phrase that, of itself, carries disturbing memories. We are further assured that what happened in Switzerland and California, with the collapse of Silicon Valley Bank, cannot happen in the eurozone.
ECB president Christine Lagarde told the European Parliament monetary committee on Monday that the European banking sector remains strong, with average liquidity ratios above minimum requirements. And she said the ECB will do what is necessary to preserve price and financial stability in the euro area.
Such assurances are welcome but the EU has still not agreed on an umbrella European deposit guarantee fund. This was meant to make banks more resilient in any return to the horrors of 2008 by reducing the risk of bank runs.
It remains to be seen whether the creation of a new Swiss banking behemoth will end turmoil there. It’s not time to panic, but nor is it the time for complacency.