A new financial crisis? Four top economists on what the bank shock means for Ireland
Nobel prize winner Philip Dybvig warns of reckless spending, while Stephen Kinsella says that Ireland would have little control over a global recession – but most agree this is different to 2008
Before last week, most people had never heard of Silicon Valley Bank (SVB). Now everyone is searching for answers in the wake of the second largest bank failure in US history. With the aftershocks still rippling through the markets, many are wondering if this is a repeat of the 2008 global financial crisis.
Ireland’s household deposits currently stand at a record €148,691m. So we asked the experts if they believe there are more bank failures coming down the tracks and — if so — is our money safe?
‘In the event of a global recession, Ireland would be like a cork in the sea’
Stephen Kinsella, Professor of Economics, University of Limerick
“Since the 14th century, bank runs have been a feature of the industry — and for the past 40 years economists have understood how they work.
“Only last October, the Nobel prize in economics was awarded to the people who came up with the defining theory of bank runs. The key insight was that what is individually rational — ‘get my money out now’ — is collectively irrational. That collapses the bank for everyone. It’s why deposit insurance and regulatory tools exist.
“So, in terms of how concerning the events of the past week are for the global economy, I would say banks are risky infrastructure, the same way bridges are. If you aren’t paying attention to the stress they’re under, they fall down.
‘There’s a trade off between raising interest rates and stressing balance sheets’
“This is a very serious situation, as it indicates that any further planned interest rate hikes will stress the balance sheets of many kinds of financial institutions.
“Policymakers know there’s a trade off between raising interest rates to fight inflation and at the same time stressing out balance sheets. They just don’t know exactly where the line is until they test it. They now know.
"So it is likely they will slow down interest rate increases, and put tools in place to help vulnerable banks tolerate any further rate hikes.
“The best-case scenario is that the height of the crisis is over. The worst is that the contagion spreads and we’ve a banking crisis on our hands.
“How long will all this take to play out? Banks fail slowly, then quickly. The decisions that sank SVB were taken over two years ago, but it only took two days to ruin the bank. When banking crises happen, they always take this form.
"All of which is a fancier way of saying I don’t know how long we’ll have to wait to see how this all plays out.
“What is certain is that if a global recession happens, Ireland has very little control over what happens to it. In that scenario, Ireland is like a cork on the sea.”
‘There has been a lot of reckless spending in recent years’
Philip Dybvig is an American economist who won the Nobel Prize (with former Federal Reserve chairman Ben Bernanke) for his research on banks and financial crises
“My general feeling is people shouldn’t panic at this point. I’m not 100pc sure — because I don’t know about the entire economy — but it seems to me that what happened to SVB is not typical, so I don’t take this as an indication of general problems.
“I think there will be some time in the future when there are problems again. But I don’t see this situation as ripe for that. We are not in another 2008. The nature of banking crises is they are hard to predict, but I don’t see the probability as high right now.
“The banking system in the US is in pretty sound shape. But I bet there are some countries — perhaps in eastern or southern Europe or other parts of the world — that have more fragile banking systems.
"Could this impact Europe? Anything could impact anything. But the issues I am more concerned about have to do with the macro economy.
“I think there has been reckless spending in the US and that is fuelling inflation. I wouldn’t be surprised if it’s the same in Europe.
“It’s ironic the Fed is taking a lot of heat for trying to fix the problem and there is no heat on the people who caused it.
"It’s interesting listening to their announcement around paying off the uninsured deposits at SVB. They sort of said: ‘Oh, don’t worry, this is free money.’ It was worded more carefully than that, but they said not one penny of taxpayers’ money will be used — and it’s like: ‘No! This isn’t free!’
“Another example is the upper-middle-class bailout in the US — paying off all student debts. Where is this money coming from? We already have inflation. So a lot of these people who already have this extra free money are finding out it’s not doing much for them.
‘I don’t think there is a good reason to have uninsured deposits’
"These are the things that I’m concerned about.
“There comes a point where you think it seems more of a giveaway, rather than to do with helping people in distress. There has to be a balance.
"After a while, cheap money wears on the economy. And it’s a trap, because if you start handing out too much free money, then when you stop, people are used to spending more — so it’s going to be painful.
“If all this cheap money can be maintained, then it’s great. But if an asset like a home is taken away after a few years because you can’t make the repayments, then it’s cruel. It’s setting people up to get crushed.
“I see no general problems in the banks right now, but I would tell people in Ireland that if you want to be more secure and protected when it comes to your money, then you can spread your money out — up to €100k each — in different banks. Irish deposits are insured up to €100,000.
“My advice to the Irish Government is it’s more prudent to have full insurance on all bank deposits. I have always advocated for this.
"I don’t think there is a good reason to have uninsured deposits. In the event of a crisis it will prevent a run on the banks. I am a strong proponent of having full deposit insurance — not having a cap.”
‘We are entering a period of anxiety about what will happen next’
Yota Deli, Assistant Professor in the School of Economics, University College Dublin
“The past week has been challenging. We have been left wondering if this is the start of another financial crisis? After Covid? After the Ukraine war? And after high inflation? And if so, what does this mean for us? Maybe it’s all inter-related...
“The Quantitative Easing (QE) of 2020 helped the economy to overcome the Covid crisis, but it did so at the cost of inflation. Especially in the US, which does not rely on energy from Russia. For Europe, the energy crisis increased inflation further. So the central banks had to increase interest rates.
“How does SVB fit into all this? With many companies relying on cheap loans up to now, higher interest rates meant it has been harder for them to continue growing. SVB came exactly at that point.
‘I do not believe we have entered a new financial crisis’
“Being one of the banks facing less regulation — due to the rollback of the Dodd-Frank act — and mostly financing promising but riskier firms, it was harder for SVB to continue operations in the higher-interest-rate environment. To survive, it had to sell bonds they owned at prices lower than they’d bought at.
“Credit Suisse was a different story. That is a bank that has gradually lost its reputation during the last two years, due to numerous scandals. The main question now for Credit Suisse is how much the rest of the European banks are exposed to their assets. This is very difficult to tell.
“What does it mean for us? I do not believe we have entered a new financial crisis. But we are in a period of anxiety. We are all waiting to see what will happen next. If we are heading towards another crisis, it will be very different to 2008. The story is never exactly the same.
“Over the last few years we have observed really high levels of growth and an increase in technology, which is great news. However, with many companies being indebted, some of them might not survive after the inevitable increase of the interest rates.
“This might be important for Ireland, because we rely so much on the tech sector. Still, the ECB has not gone to extremes with their increase in interest rates. Interest rates now are only just back to pre-financial crisis levels, and I would say — for now at least — inflation seems to have started stabilising.”
‘The Irish banks are well positioned. I’d be much more worried about Italian banks’
Davide Romelli, Assistant Professor in Economics at Trinity College Dublin
“There has clearly been panic in the market — but personally I’m not worried. I started trading for my father when I was 14, because it was the beginning of the internet period and trading online was cheaper than going to the bank. So I’ve experienced the dot com bubble, the global financial crash and Covid.
“Certainly, crises happen at a much higher frequency than they used to — but if there’s one thing I’ve learned, it’s that it’s wrong to have a knee-jerk reaction. Instead I’m reassured by the Government’s report that shows the stability of the banks in Ireland in terms of capital requirements.
‘I think AIB and BoI are down a lot more than they should be’
“I think Irish banks and regulators learned a lot from the last crisis. And even if there is going to be contagion across European banks, Irish banks will be among those least affected. I’d be much more worried about the Italian banks, which have a large exposure to government debt.
“It strikes me that AIB and BoI are down a lot more than they should be, for how well-placed they are.
“Culturally we had a crisis in the banking sector 15 years ago — and most of the people trading now are still affected by it, so I think there’s a certain degree of trauma. But knowing the statistics, if I had to invest in the banking sector, I would be far more likely to invest in Ireland than in any other EU country.
“On Thursday, the ECB increased interest rates by 50 basis points. Bank president Christine Lagarde stressed the importance to the ECB of a data-dependent approach, avoiding any indication on the key policy rate that might be adopted during the next press conference, on May 4.
“But given the current market uncertainty, the decision of the ECB to increase interest rates by 50 basis points can be considered good news. A 25-basis-point increase would have been considered a signal of the fragility of the European banking sector.
“In addition, Lagarde has said the Eurozone banking sector is resilient, with strong capital and liquidity positions. In any case, our policy toolkit is fully equipped to provide liquidity support to the euro area financial system if needed.
"So I wouldn’t be surprised to see stocks such as AIB and Bank of Ireland begin to climb again this week.”
