The question of whether we are on the verge of another financial crisis comparable to the one that occurred in 2008 has been raised by London authorities in response to turmoil in the banking sector. Yet due to social media, net banking, and significant regulation changes, a banking crisis today would appear very different from one 15 years ago.
Paul Donovan, the chief economist at UBS Global Wealth Management, stated earlier this month on CNBC that the collapse of Credit Suisse is “the first financial catastrophe of the Twitter generation.”
On March 14, the discovery of material weaknesses in its financial reporting caused Credit Suisse’s shares to fall drastically. The announcement set off a turbulent five days for the banking industry, which concluded with the rival Swiss bank UBS deciding to acquire the troubled company.
Donavan continued, “What social media has done is increase the importance of reputation, probably tenfold, and I think that’s part of the problem.”
According to Jon Danielsson, director of the Systemic Risk Unit at the London School of Economics, social media allows “greater scope for destructive rumors to proliferate” than it did in 2008.
Digital banking, social media usage, and other factors make the financial system more susceptible than it otherwise would be. At a gathering last week, Jane Fraser, CEO of Citi, declared that the demise of Silicon Valley Bank was a game-changer. Regulators shut down the bank on March 10 in the largest bank catastrophe in the US since the 2008 global financial crisis.
Solid Financial Ground
Following the financial crisis, the European Union made significant efforts to stabilize the region’s economic situation, including establishing new financial oversight organizations and implementing stress testing to anticipate any challenging scenarios and prevent a market meltdown.
According to Danielsson, this makes it “unlikely” that European banks will see any problems on the same scale as in 2008.
“[Bank] funding is more stable, authorities are considerably more aware of the risks, and capital levels are higher.” – Danielson adds.
Bob Parker, a senior advisor at the International Capital Markets Association, said last week on CNBC’s “Squawk Box Europe” that banks should have much more capital as a buffer today. Moreover, he added that bank leverage ratios are a good metric for gauging the difference between the current financial situation and 2008’s financial situation.
According to this analysis, liquidity is high, and leverage is low among the top 30 or 40 global banks. According to Parker, today’s risk in the banking system is substantially lower than it has ever been in the previous 20 or 30 years.
The European Banking Authority, established in 2011, emphasized: “the European banking sector is resilient, with healthy levels of capital and liquidity.” – responding to the financial crisis as a component of the European System of Financial Supervision.