This reassuring statement came after the rescue deal for Credit Suisse, which rival UBS bought in a Swiss government-backed deal, aimed at preventing fears from spreading over the global financial system.
The rescue deal was secured after regulators worked around the clock to get a deal done before the financial markets opened on Monday.
Despite the action taken by regulators, shares in European banks still fell, with Deutsche Bank and UBS trading 1.8% and 3.7% lower, respectively.
However, experts are not forecasting a repeat of the 2008 financial crisis, which saw several big banks fail and sparked a global recession.
The Swiss National Bank stated that the rescue deal was the best way to restore financial markets’ confidence and manage economic risks.
Mark Yallop, the former UK CEO of UBS, stated that UBS’s takeover of Credit Suisse “should” bring a good degree of confidence back to the banking market. He also noted that the sale of Credit Suisse should be viewed as a separate event from the failure of two smaller banks in the US, which he said were impacted by rising interest rates.
Six central banks, including the Bank of England, announced that they would boost the flow of US dollars through the global financial system to keep cash available through the global financial system. This move serves as an “important backstop to ease strains in global funding markets” and relieve pressure on banks.
Following UBS’s takeover of Credit Suisse, the Swiss National Bank stated that the deal protected the Swiss economy “in this exceptional situation.”
The 167-year-old bank has faced many problems in recent years, including money laundering charges, and was given an emergency $54 billion lifeline from the Swiss National Bank.
UBS chairman Colm Kelleher stated that the takeover had been “attractive” for UBS shareholders but described it as “an emergency rescue.”
The Bank of England welcomed the “comprehensive set of actions” set out by the Swiss authorities and stated that it would continue to support their implementation.
President of the European Central Bank, Christine Lagarde, also welcomed the “swift action” of the Swiss authorities and stated that the euro area banking sector is resilient with strong capital and liquidity positions.
US Treasury Secretary Janet Yellen and Federal Reserve Chairman Jerome Powell stated that the US banking system remains “resilient.”
There’s a common factor behind the challenges faced by Credit Suisse and the two smaller US banks; rising interest rates.
As central banks hike rates to curb rising prices, banks holding government bonds have suddenly found their assets worth less than expected. These lower asset values have affected the entire banking sector, but smaller banks are more vulnerable.
Savers have little reason to worry about their funds as deposit protection is in place. For the Isle of Man, the Depositors’ Compensation Scheme (DCS) protects eligible protected deposits up to £50,000 with Isle of Man offices of covered banks licensed by the Isle of Man Financial Services Authority.
In the UK, £85,000 per person, per institution is protected under the Financial Services Compensation Scheme (FSCS). Protection is similar in the EU, and the US government has safeguarded deposits of up to $250,000.
The issues experienced these past few weeks have been contained as we write this. While some parallels will be drawn with the start of the global financial crisis, stricter capital requirements and more substantial regulatory requirements today should create a more robust banking sector.
Decisive action by central banks to ensure liquidity for banks should be sufficient to prevent contagion. However, we could see the banking sector face even stricter rules in the future, likely to mean global economic forecasts are more modest in response.
