The financial market turmoil unleashed by the collapse of US lender Silicon Valley Bank (SVB) has recalled the great national trauma caused by the collapse of Ireland’s banking system and economy 15 years ago. Finance Minister Michael McGrath has sought to assure the public that the situation is being “monitored” by the Irish Financial Stability Group and has spoken of the “limited direct impact” on the Irish financial system.
The group referred to consists of officials from the Department of Finance, National Treasury Management Agency (NTMA) and the Central Bank of Ireland, as well as officials from other relevant departments and agencies.
Insofar as it goes, this is a welcome announcement, although the public understandably remain sceptical about such assurances, given what occurred in 2008 after bankers and regulators were adamant the country’s banks were well placed to withstand such turmoil.
Similarly, this time bankers and regulators have been anxious to point out that the level of capitalisation and liquidity in the Irish banking sector is strong. That may be the case, but there remain wider concerns for the economy. SVB was a technology-focused lender with US$209bn (€194bn) in assets, making it the 16th-largest bank in the US, listed on the Nasdaq exchange, which had a significant number of Irish businesses among its clients.
The company focused on lending to technology companies, providing services to venture capital, revenue-based financing and private equity firms that invest in technology and biotechnology.
In addition to taking deposits and making loans, the bank operated venture capital and private equity divisions that sometimes invested in the firm’s commercial banking clients.
While there is acknowledgement that Ireland has considerably strengthened its financial sector regulation and supervision since the crash 15 years ago, there are still worries about the effects of the current crisis on the wider economy.
As recently as last July, the International Monetary Fund said that despite global headwinds, Ireland had achieved strong economic growth and had a “highly capitalised and liquid banking system”. It suggested the strengthening of the financial sector here was evident by the successful navigation through the challenges of Brexit and the coronavirus pandemic — at a time when the global economy is also learning to live with the Russian invasion of Ukraine. The current crisis has its roots in soaring inflation caused by the pandemic and the war.
To contain and reduce inflation, central banks have steadily raised interest rates, exposing some banks such as SVB and others in the US, leading to a contagion that has spread to Europe to hit the already-troubled Credit Suisse bank.
In this newspaper today, experts refer to concerns the banking crisis may have for the wider economy, with one economist stating: “What is certain is that if a global recession happens, Ireland has very little control over what happens to it. In that scenario, it is like a cork on the sea.”
The fact is, rapidly climbing interest rates weigh on stocks and bonds, threaten investment plans, hamstring property markets and drastically limit the financial flexibility available to governments. While the finance minister has highlighted “the limited direct impact” on the financial system here of the failure of SVB, the department must remain vigilant to the potential wider impact on the economy.