SVB, Signature Bank, Credit Suisse – What next?
Banks play a critical role in maintaining the health and stability of the financial system, and their proper functioning is essential for the overall well-being of society. Historically, they have always been there—in one form or another—constituting an integral part of the society; interestingly, the word bank derives from the Italian word Banco, which means a bench or money exchange table; ‘bankers’ used to operate through these benches, usually situated at the entrance of the city-walls during the Middle Ages.
A bank is to society what the organs are in a body. As with organs, if they collapse, so does the human body; the banks are equally vital for the economy and society – should they collapse, they put society at risk. Here are some interesting angles of this comparison:
Function: Just as organs in the body have specific functions, banks in society also have specific functions. Organs perform various tasks like digestion, respiration, circulation, and elimination of waste. Similarly, banks in society perform various financial functions such as accepting deposits, lending money, issuing credit cards, and facilitating electronic transactions.
Interconnectedness: Organs in the body are interconnected and work together to keep the body functioning properly. Similarly, banks in society are interconnected and work together to keep the financial system functioning properly. Banks lend money to each other, invest in each other's products, and provide services to each other.
Regulation: The body has an intricate system of regulation that helps maintain the balance of different organs and systems. Similarly, banks in society are regulated by various regulatory bodies such as central banks, financial regulators, and government agencies to ensure that they operate within the limits of the law and do not cause harm to the economy.
Vulnerability: Just as organs in the body can become diseased or fail, banks in society can also become vulnerable to various risks such as fraud, market fluctuations, and economic downturns. In both cases, early detection and intervention are crucial to prevent further damage.
Given the above, I wonder: How did we end up experiencing a ‘contained’ banking crisis once again, so soon after the last one? We all remember how close we came to a systemic collapse during the 2008 crisis. The therapy then, or rather the lesson learned, led to more regulation, more and more complex operational processes, and lots of reporting. Was this enough? Maybe not, judging from recent developments.
The interconnectedness of the banking system is still a cause of risk. The vulnerabilities the banks still face have not yet been fully mitigated. And finally, there is always the human factor, which affects how banks operate and function - yet another less manageable risk factor.
For the moment, we seem to have overcome the threats to the banking system and, by consequence, to society. Regulators, central banks, and governments have acted swiftly in the case of SVB and more so in the case of Credit Suisse and have contained a bank crisis expansion.
Still, societies and their citizens got the shivers… and many around the world probably wonder: how can I protect myself from another bank crisis?
