The recent banking crisis – the collapse of a handful of small US banks and one very big European one – has caused jitters in financial circles. This may partly be because the global financial crisis of 2008 is still relatively fresh in our memories, and we are still living with its fallout 15 years later.
The two events were each characterised by a loss of confidence, or trust, in the banking system. But the recent crisis can, in no way, compare with what has come to be termed the Global Financial Crisis (GFC).
The 2008 crisis was genuinely systemic in that it threatened the entire global financial system. Toxic assets derived from sub-prime housing bonds in the US (mortgages given to people who, in reality, could not afford them) had managed to worm their way into investments across the world that, on the surface at least, had looked respectable. So embedded and “camouflaged” were these high-risk assets that no one was sure of the extent to which they were exposed.
In short, there was a high level of risk in the system which could not easily be identified or flushed out. Therefore everyone and everything was suspect, and trust evaporated.
Known or expected risk is unlikely to cause a crisis in itself because it is priced into financial markets. It is an unknown or unexpected risk which materialises suddenly that can, quite understandably, result in panic.
Silicon Valley Bank in California experienced a typical bank run. Panicked account holders converged on the bank to withdraw their money and it couldn’t handle the sudden outflow. Amazingly, it had oodles of cash, but the cash was all tied up in long-term US bonds whose value had dropped because of the recent increases in interest rates. Bank managers are typically conservative and hedge their risks. The managers of SVB had no such “insurance” in place.
On the other side of the Atlantic, the mighty Credit Suisse collapsed through a series of scandals and bad investment decisions on the part of its management, which left its reputation in tatters.
It seems both failures were caused more by internal management problems than external factors, although the interest rate hikes are certainly stressing the system. This has been alleviated to some extent by the US Federal Reserve interventions to guarantee deposits.
One must also not forget that the GFC resulted in a major overhaul of the European and US banking regulations, although some of the measures introduced to protect consumers’ assets were relaxed under the Trump administration.
Interest rate concerns
Back in 2007, the sub-prime crisis started when borrowers who could only just afford to repay their mortgages at a low-interest rate could no longer afford them when the rates rose, and started defaulting on a vast scale. Are we in for a repeat?
A recent article in Forbes, “Housing Market Predictions For 2023: Are Home Prices Finally Becoming Affordable?”, indicates that, despite the hikes, which have been considerable for mortgage holders in the US, most folks are managing to hold on to their properties, and that the drop in house prices is actually having a stimulating effect on the market.
Here in South Africa, we’re pretty used to higher, more volatile interest rates. Rates are only slightly higher than they were before the pandemic. It’s tough though, for those who took out bonds when interest rates were at their lowest, in July 2020.
Reflecting on the situation for South African consumers in the latest PwC Economic Report, Christie Viljoen, PwC South Africa’s senior economist, says: “We see room for the repo rate to start declining late this year as inflation moderates towards the midpoint of the SA Reserve Bank’s 3-6% target range. The key factor here is the speed at which inflation is able to moderate. Consumer goods companies (including food producers) have warned of more supply chain price pressure that will need to be passed on to consumers this year.”
The report states: “Rising debt service obligations are an added burden for consumers. We expect debt cost as a percentage of disposable income to increase from 7.2% last year to 9.1% in 2023. This will further impact the ability of consumers to repay their loans. From a banking perspective, the collapse of two US-based banks in March raised concerns globally about the stability of banking systems that are already dealing with consumers struggling to repay debt. However, our newly released Major Banks Analysis found that higher earnings and optimised capital demand have helped keep [South African] banks’ capital ratios well above the levels required by regulations.”
The bigger threat here in South Africa is the self-inflicted damage to our economy. Financial writer Jonathan Katzenellenbogen, in an article in The Daily Friend, writes: "The risks rise with a weak economy, the inevitable rise in defaults, the grey-listing, the large budget deficit, poor prospects for reform, and the rise of mafias and fraud. While the risks have been around for some time and might seem minimal, they could become large in a perfect storm. That is the way of many banking crises."
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