A bit of calm has been restored to financial markets, at least for now anyway. Looking back at the last two weeks in the world of banking, what have we learned?

Here are seven things that have cut through the fog of uncertainty and fear.

1. Regulation of US banks

The regulation of US banks is still highly suspect and subject to too much political interference. The collapse of Silicon Valley Bank (SVB) came as a surprise to many. It shouldn’t have. The bank was exposed to a single sector (technology), while having too much of its customer deposits ($91bn or €85bn) invested in a single asset class. Both technology and that asset class of long-term US bonds were vulnerable to higher interest rates.

Regulators should have been questioning this vulnerability long before the high speed run on the bank was triggered. Republicans in the US political system have been opposed to very stringent regulation which has left smaller banks more vulnerable to shocks that have a wider international reach. There could be more to come.

2. Mistakes can come back to haunt you

Mistakes made by bankers in badly run organisations can come back to haunt everybody. SVB made elementary risk management mistakes. Credit Suisse was badly run for years. Current management were trying to fix the unfixable.

In October 2021, the bank was fined $475m by US and British authorities after it was caught up in a bribery scandal in Mozambique involving loans to state-owned companies.

There were the multi-billion dollar losses after the collapse of Greensill Capital and the Swiss financial regulator FINMA concluded that the bank “seriously breached its supervisory obligations” and ordered “remedial measures”.

Just four weeks after Greensill, Credit Suisse lost more than $5bn from the implosion of US hedge fund Archegos. Its chairman had to resign for breaching Covid regulations.

A Bermuda judge said it had failed in its fiduciary duty when a former prime minister of Georgia lost $500m through an affiliate company. Then there was the $2m fine in a money-laundering case linked to a Bulgarian cocaine network.

As recently as a fortnight ago it accepted findings from the SEC in the US that it had material weaknesses in its internal controls. Now it is dead. Can’t say nobody saw it coming.

3. Banking boils down to trust and confidence

In case we had forgotten, banking boils down to trust and confidence over facts. Credit Suisse passed all of its European banking stress tests but it failed anyway and the Swiss state is potentially on the hook for over 100bn Swiss francs through the shotgun takeover from UBS.

Credit Suisse lost the confidence of its backers. And then it lost their trust.

A catalogue of scandals and failings undermined the ability of new management to bring it through from past mistakes.

So even if Irish banks, or banks anywhere else in Europe pass the stress tests, anything that undermines confidence can have a very damaging outcome.

4. Irish banks have benefitted from tough post-crash regulation 

Irish banks have truly benefitted from the tough hand of European regulation after the last crash. Much heavier regulation has left Irish banks with a more sustainable business model, better lending practices and billions of euro on deposit with the ECB from which they are now earning huge interest payments.

In a banking wobble where questions were being asked about the value of bonds or how much banks might owe bondholders, cash is king. Irish banks are now well capitalised and that includes cash.

5. Burning bondholders

The ECB and the European Commission may have shafted Ireland by not letting us burn bondholders in the past, but this time round there is greater pan-Euro solidarity. If we cannot burn bondholders in a crisis under EU rules, then we will at least be helped out by those European institutions setting the rules.

In the case of Credit Suisse there has been consternation that $17bn of additional Tier One capital bonds have been wiped to zero. The Swiss authorities who helped oversee the deal with UBS have made a calculation. Most of these bonds were held by private Asian clients and they feel it is better to burn them.

The EU is saying it wouldn’t do this with bondholders in a similar situation.

6. Too slow to hike

It is now very clear that under Christine Lagarde the ECB acted too slowly in putting up interest rates to tackle rising inflation at the beginning of the cost -of-living crisis. It is caught with having put up rates at the fastest speed since the 1980s and knows what further sharp rises could do to the underlying economy as well as confidence in the banking sector.

If it slows the speed of interest rate hikes now to protect banking confidence, it may fail to curtail inflation quickly enough. The ECB has basically got to a point where it has no idea what it is going to do next.

An earlier recognition of the threat that inflation posed and the bank wouldn’t have had to hike rates by so much, so quickly. It now looks trapped by how events have unfolded.

7. The next big bank collapse will be a sprint and not a run

It has been widely suggested that the SVB collapse was accelerated by posts on Twitter. In reality, bank runs have always tended to happen quickly.

What transpired in the last two weeks is now like a call of “on your marks” at a starting line. The gun might not go off, but if it does, everybody will be ready. We will probably see a few false starts too. More wobbles are likely in the banking sector as the full impact of higher interest rates feed through the global economy.

The cost of credit could rise and banks may well rein in their risk appetite. Commercial real estate, private equity, leveraged companies and growth in the tech sector will all be negatively impacted.

It is unfortunate to think that a US bank like SVB, which was allowed to make mistakes in risk management, could result in a real blow to the Irish tech ecosystem. Regardless of those companies that had been banked by SVB, the impact on the wider funding will definitely hamper a tech scene here that was thriving. 

Perhaps a greater element of financial realism will stand to it in the long run. 

The last big banking crash was built on reckless lending. So far we have seen three bank collapses between the US and Europe and nobody has yet suggested that money lent out was the problem.

That may come next.