The right name for the crisis

2023-03-29 at 11:35 Timo Löyttyniemi

A crisis needs a fitting name. The financial markets are struggling with problems that make it necessary for governments and central banks to step in. The current situation meets the criteria for financial instability. We should find a descriptive name for it. Here are some suggestions.


Great Inflation

One of my previous blogs was headed ‘Great Inflation’. Posted on 1 July 2022, it addressed the rising inflation. I wrote that the name would be appropriate because the situation had changed radically. At the same time, interest rates kept climbing throughout 2022 causing a lot of pain. The energy market was plunged into chaos in August 2022 driving UK pension companies to the brink of collapse. Later we learned that the problems of Silicon Valley Bank in the United States could also be explained by the rise in interest rates caused by high inflation and the mistakes made by the bank management.


Cryptocrisis

If the events that occurred in March this year had ended on March 8, we could have named the crisis ‘cryptocrisis’. By then, the crypto exchange FTX had gone into liquidation in November 2022, Silvergate Bank had gone into a controlled shutdown and cryptocurrencies had lost value over the autumn and winter. However, as the crypto market is not a market requiring a government bailout, it does not, strictly speaking, meet the criteria for creating financial instability. But the crisis proved to be more extensive than that.


Silicon Valley Bank crisis

Silicon Valley Bank (SVB) ran into crisis and was taken over by the authorities on 10 March. Because SVB differed from other regional banks in terms of its modus operandi, customer base and risk-taking, the situation could be described as a single-bank crisis. The SVB's unrealised losses corresponded to its equity. SVB's management had taken excessive risks, while the authorities had allowed reporting that did not require full disclosure. The market was given to understand that the bank was sound. In reality, this was not so, at least by the time depositors became aware of the situation.


Regional bank crisis

At times, the March financial crisis in the United States has resembled a regional bank crisis. A couple of regional banks got into trouble, creating distrust in other banks as well. Investors are trying to figure out the next victim. Major developments are taking place. Led by JPMorgan, 11 banks announced deposits of USD 30 billion with First Republic Bank. According to the policy of the FDIC, losses incurred as a result of a FDIC restructuring are covered by assessments or contributions collected from the banking industry. This encourages other banks to solve imminent problems in advance.


Crises of banks

In Europe, Credit Suisse (CS) ran into problems in March and a solution was found on 19 March. CS was acquired by UBS with the assistance of the Swiss authorities. SVB and CS were unrelated cases that had nothing to do with each other. Hence, the crises affecting these two separate banks (and a few others) could be termed as ‘crises of banks’. They are isolated events because problems were primarily due to mismanagement and unreasonable risks.


Financial crisis

If inflation, interest rates and property values remain within reasonable limits, a wider banking or financial crisis will be avoided. For the time being, the markets are confident that things are moving in the right direction. Given the sensitivity of the banking and investment markets, central banks must succeed in their policies designed to contribute to a favourable development. The real financial crisis of 2008 was also given another misleading name, the ‘Great Recession’, widely used particularly in the United States. In Europe, the original name was luckily retained.


QE crisis

When the time for a post mortem of the QE crisis arrives, we will also be compelled to review the central banks’ asset purchases. Central banks started buying assets after the onset of the financial crisis and have been unable to dispose of these securities over the past 10 years. This has happened despite the fact that the maturity of these securities is limited and the loans are repaid at maturity. The symbiosis between governments and central banks has grown deeper, which has kept interest rates lower than they would have been otherwise. Similarly, the rise in interest rates was sharper than it would have been under different circumstances. So, when interest rates finally shot up, the surprise was all the more shocking.


In conclusion

The choice of name for this crisis is influenced by the time of writing the blog. It is not a good idea to write a blog too early, as the big picture will not yet be visible, and the conclusions will be incomplete. On the other hand, if you wait too long, you end up writing history. All of the above names for the crisis are probably named appropriately. The current crisis includes elements of all of them. This is crises of banks but not a banking crisis.

The writer is VER's CEO Timo Löyttyniemi.

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