2023-04-30 16:53:10
The repercussions of the collapse of Silicon Valley Bank and Credit Suisse continue to have a deep impact, and it has become an issue raised for wide and continuous discussion among specialists, experts and financial advisors of banks regarding treatment, and expressing their opinions to propose appropriate solutions to such collapses. The world has gone through different experiences during the last period, so letting these banks collapse may lead to chaos in the financial system, and with it a collapse whose end is unknown in the global economy.
Financial systems have become so interconnected that no country can remain far away without being harmed in any way. With the increasing role of banks, and also their exposure to financial shocks, the role of the government in saving troubled banks has become more important, and it needs a clear framework, especially since not every country has the ability to save troubled banks, just as every country has a limited ability to enforce global directives regarding the process. Rescue.
In this regard, an article was published in the “Financial Times” newspaper, written by Harold James, author of the book “The Seven Collapses”, and published by “Al-Iqtisadiah” recently, in which he confirms this fact, and that not all countries are able to save, rather the idea itself requires a clear review.
The rescue of troubled banks comes through what is called “deposit insurance”, which is the government’s guarantee that the funds of the account holder in the bank are insured up to a certain amount, by a deposit insurance institution that is established in each country, and many central banks join the International Federation of Deposit Insurance Companies. IADI, which includes 110 members concerned with enhancing the effectiveness of deposit insurance and international cooperation, including observers and partners representing central banks, international bodies, financial institutions and depositor protection funds.
The idea of securing deposits includes taking over the failed bank by another financial institution, on the basis that this will ensure that depositors’ money is not lost, that their accounts are immediately transferred to the new bank, this very idea that the author of the book “The Seven Collapses” criticizes, and that banks The accounts to which the accounts are transferred are subject to pressure during the transitional period, and this is cited as an example of what happened at the beginning of the Great Depression 1929, when the Bodencreditanstalt, the largest bank in the country at that time, failed, as it was forced to carry out the acquisition, and after less than two years This bank collapsed, and the system collapsed. The German banker too, and then panic spread in London and New York, announcing the beginning of the Depression.
What actually happened is that the depositors, creditors, and shareholders realize that the failure was due to corruption, so as soon as things calm down, everyone begins to withdraw their money quietly, which makes the bank that carried out the acquisition exposed to a new disaster, unless the government intervenes itself and supports the bank. Banks are the work of the government, and the measures that are taken are only to calm people from the unorganized rush to withdraw deposits that threatens the financial system and the economy as a whole. That is why some large banks protect themselves by refusing the acquisition process. In the acquisition process, Deutsche Bank rejected the government’s request to take over another bankrupt bank, and here Harold James frankly criticizes the rescue of Credit Suisse by throwing it into the arms of UBS, hastily, without negotiations, which threatens to repeat the German bank’s experience .
But why was the Swiss bank bailout done in this way? The writer refers to Switzerland’s pursuit of the American model that took place in 2008, when “JP Morgan” bought Bear Stearns Bank, as the process succeeded, and JP Morgan is still in good health.
It is clear that a strong bank managing integration with a collapsing institution is a successful process, but the German experience before the Great Depression was also still successful, as it seems to the writer, so how can the two models be combined? The author of the book “The Seven Collapses” confirms that this measure depends on the support of a huge federal budget and a central bank with a balance sheet. The United States, and perhaps China as well, can succeed in such operations, but they are very dangerous for small countries, as large financing suits the players. Adults only, according to the author’s description.
And if this theory is correct, and that a large rescue of this size requires a strong and stable financial system as well, then how do small countries act? The writer lays out his philosophy in this regard that large banks in countries with small financial space become a serious threat, and he cites that crises in large banks led to financial instability in Ireland and Iceland, and this required rapid intervention from the International Monetary Fund, and accordingly the countries Those with a relatively small financial space should not include “too big to fail” banks, and the solution is to let these banks fail if necessary, or for the acquisition to take place through serious negotiations, and not through a political process that may have a dangerous impact.
So we will have to monitor the behavior of UBS over the next year and beyond to understand the profound impact of this author’s theory, and whether depositors and shareholders will exit UBank. with me. S.M. This bank can prove that behavior has changed with modern payment systems, wide access to money, and seamless inter-bank transfers.
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