Tensiones financieras recientes, sus posibles consecuencias.

The financial tensions that have arisen in the United States this month and spread to one of the main Swiss credit institutions have generated a series of actions and brought to light several issues that are worth reflecting on in relation to the possible financial crisis.

Two fundamental conclusions can be drawn:

• Firstly, in general, public authorities have acted quickly and decisively;
• Secondly, despite the origin of the turbulence being in the United States the dollar remains the predominant currency.

Financial authorities and regulators' actions

Regarding the performance of public authorities, it must be acknowledged that the Federal Reserve (Fed), the U.S. Treasury, and the Federal Deposit Insurance Corporation (FDIC) have acted forcefully and decisively. Through the establishment of the Bank Term Funding Program, providing loans up to one year to banks in exchange for collateral, the Fed has limited the contagion of liquidity issues to the entire U.S. banking system, thereby promoting the continuity of credit provision activity.

Furthermore, the activation of the systemic risk exemption has allowed the FDIC to cover all deposits, including the non-guaranteed ones, of Silicon Valley Bank and Signature Bank. This action has sparked considerable debate among experts.

It is likely that, in this specific case, it has allowed to significantly mitigate any contagion risk. The coordination by public authorities of the country's banks is also positive, and it has resulted in 11 US banks depositing $30 billion in First Republic Bank, the fourth bank with potential difficulties.

Finally, the Fed's decision on monetary policy, raising rates by 25 basis points and thus sending a message that the issue is under control, is an indication that everything possible is being done to avoid a financial crisis.

On the other hand, in Switzerland, the Swiss Financial Market Supervisory Authority (FINMA), the Swiss Government, and the Swiss National Bank facilitated the merger between UBS and Credit Suisse. Additionally, the Swiss government has provided UBS with a guarantee of up to 9 billion Swiss francs to cover potential losses on acquired assets, and another guarantee to the Swiss National Bank for sufficient provision of liquidity to Credit Suisse. In turn, the Swiss National Bank has made available to UBS and Credit Suisse a loan of up to 100 billion Swiss francs.

However, the most controversial aspect of the Swiss authorities' actions has been the amortization of Credit Suisse's AT1 instruments, without having previously amortized all the capital and reserves. The need to impose losses on the shareholders and creditors of the entity derives from the public support provided by the Swiss government.

Financial tensions in the United States and how they have affected a Swiss credit institution

Doubts about the interpretation of the hierarchy of creditors have caused uncertainty in the markets during the financial crisis, leading FINMA to issue a statement explaining the legal basis for proceeding in this way.

In response, the authorities of the European Union (Single Resolution Board, Single Supervisory Mechanism, and European Banking Authority) have reaffirmed the hierarchy of creditors in the EU to reassure the markets and improve confidence in AT1 instruments.

In addition, statements from eurozone central bank officials and supervisory authorities have demonstrated the strength of the European banking sector in terms of capital and liquidity, as well as its reduced interconnection with the affected entities in the crisis.

Furthermore, it has been observed that the European Union has a different regulatory and supervisory approach than the United States, where medium-sized entities are treated preferentially in terms of prudential capital and liquidity requirements. In the EU, the supervisory review and evaluation process takes into account the business model as one of the bank.

The banks in the EU possess a more diversified customer base, and unsecured deposits are more relevant in banks with highly diversified business models on both the asset and liability sides.

Additionally, it has been observed that the US dollar remains the ultimate currency during financial crises. Investors see it as a safe haven asset, raising questions about the future international role of the euro.

In conclusion

To summarize, financial tensions are expected to calm down soon, rendering this type of analysis unnecessary. Public authorities have acted quickly and decisively, and the EU has a different regulatory and supervisory approach than the United States. This article also examines the actions taken by public authorities and their impact on the situation, addressing concerns about the hierarchy of creditors and the role of the euro as an international currency.

 

References

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