May 22, 2024

Could banking fears spark another Global Financial Crisis? | The Business | ABC News



Published May 17, 2023, 5:20 a.m. by Liam Bradley


The banking sector is once again under the spotlight as fears of another global financial crisis mount.

The business world is on edge as the US Federal Reserve prepares to raise interest rates for the first time in nearly a decade.

There are concerns that higher rates could trigger a sell-off in global stock markets and put the brakes on economic growth.

So, could banking fears spark another global financial crisis?

It's been nearly 10 years since the last global financial crisis erupted.

And while the world has changed in many ways since then, there are some worrying parallels between now and then.

Once again, the banking sector is at the centre of attention.

And once again, there are fears that a major financial institution could collapse, triggering a domino effect that would plunge the world into recession.

In 2007, it was Lehman Brothers that went under.

This time around, it could be Deutsche Bank.

The German lender is struggling with a host of problems, including a mountain of bad loans and a US$14 billion fine for its role in the 2008 financial crisis.

Its share price has plunged to record lows in recent weeks and there are concerns that it could be forced to raise capital or even be nationalised.

Deutsche Bank is not alone. There are other European banks that are also in a precarious position.

Italy's Monte dei Paschi di Siena is the most troubled of them all.

It has been struggling for years and is now teetering on the brink of collapse.

The Italian government has been trying to find a buyer for the bank but so far, no one has been willing to step up to the plate.

There are also concerns about the health of the banking sector in the United States.

The largest US banks have been reporting strong profits but there are fears that they could be sitting on a time bomb of bad loans.

And then there's China.

The world's second-largest economy is facing a slowdown and there are concerns that its financial system is not as robust as it should be.

A sudden drop in the value of the Chinese currency, the yuan, earlier this year sent shockwaves through global financial markets.

So, could all of these factors come together to trigger another global financial crisis?

It's impossible to say for sure.

But what is certain is that the world is a lot more interconnected than it was 10 years ago and that any shock to the system could have far-reaching consequences.

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biggest banks Credit Suisse has become

the latest casualty of the banking

crisis now its biggest rival UBS is

taking it over this is no bailout this

is a commercial solution the Scandal

plagued bank's latest troubles began

after admitting lacks Financial controls

in previous years the bankruptcy of a

global systematically important bank

would have crossed irreparable economic

turmoil in Switzerland and throughout

the world the government-backed deal

will see UBS Pages 4.8 billion dollars

for Credit Suisse the Swiss Central Bank

will provide 160 billion dollars in

liquidity assistance and the government

will guarantee losses up to 14.5 billion

dollars UBS will remain Rock Solid the

rescue deal follows the collapse of two

Regional U.S banks and an emergency

Lifeline for another in addition six

central banks now announced they would

boost the flow of US dollars through the

Global Financial system The Reserve Bank

is hosing down fears our banks could be

impacted what we're talking about here

is a few institutions that were poorly

managed and did not meet those higher

standards it's not yet clear if the deal

is enough to restore trust in lenders

around the world job losses are

inevitable and financial markets are now

betting that central banks will stop

hiking interest rates just one of many

things that the board will be taking

into account when it makes its decision

next month raising interest rates push

you into more of a recession however

perhaps this banking crisis pushes you

towards a recession anyway the r word

that's getting harder to avoid

so will the banking Mega deal avoid a

full-blown financial crisis former

investment banker Mike Mangan expects

more contagion especially if the U.S fed

raises rates this week

one of the things that's driving this

and I'm not sure Central Bankers are

really on top of this but every time

they raise interest rates they ratchet

up the pressure on the banks and

there'll be not all banks but there'll

be some banks on the periphery that will

be exposed and so we've had three that

have fallen over in the last 10 days

two because of unrealized losses on

their on U.S Bond portfolio and CS

because there's just been a general lack

of confidence because they've had a few

uh

foul-ups in execution

but I suspect that if if the U.S raises

interest rates on I think it's Wednesday

you're going to see more pain and and a

few shrieks pain in in which areas in

just the regional Banks although

systemically important Banks

well well the thing the thing about a

contagion is you don't know where it's

going to pop up I mean 10 days ago no

one had any or maybe two weeks ago no

one had any idea that Silicon Valley

Bank was a problem and then it all blew

up in like two or three nights um no one

really expected I'm shocked I mean I was

I worked for Deutsche Bank for for many

years and CS was a uh a competitor and I

I respect them

um and I'm shocked that that it's come

to this so you just don't know where

it's going to come out but I'll tell you

where there is one pressure point what

they've done what Yellen has done in the

U.S is that she's implicitly guaranteed

the deposits of all the large Banks

so Bank of America and and JP Morgan any

depositor there over 250 000 they've got

an implicit guarantee but America's got

thousands of Banks and if you're in one

of the others like the other 3 900 banks

that aren't implicitly guaranteed and

you've got more than 250 000 you're

thinking right at the moment should I be

moving my money and if enough people do

that from whatever Bank

then that's where the contagion

continues it's like a Bushfire we've got

we've we've had 15 years of zero

interest rates that's the furnace that's

been created and someone's lit the match

and the fire is off and running well we

know the FED is now sitting on huge

losses with its exposure to the the

government bonds the long dated ones

just how strong do you think the central

bank is

well technically it's insolvent

but only if they're forced to sell those

bonds now that will argue and it's a

good argument that they'll just hold the

bonds to maturity so I I they are

technically insolvent but I think you

know because they're the fed and they're

backed by the US government and they can

hold them these the bonds to maturity

they're probably okay the the one I'd be

more worried about is the FDIC which

guarantees

um Bank depositors in America now they

may be their entire portfolio is U.S

bonds the same instrument that brought

down Silicon Valley Bank

and they're sitting on huge unrealized

losses

but if they're not forced to realize the

losses they just sit there in the books

and everyone sort of pretends they don't

exist but if they're forced to sell

because you've got a number of banks

that are uh people are pulling out their

uh their deposits and the number of

banks fall over and they're and the FDIC

is forced to sell their Securities then

you could have a problem we're not there

yet but it is possible well we know that

this is moved at Breakneck speed just

looking at bonds more broadly I mean can

they still be considered safe in light

of what we've seen over the last week

at the at the end of the day they're

backed by the guarantee of the of

whatever government has issued the bonds

I presume we're talking about government

bonds because you know they're only as

good as and they're only as good as the

country's backing now this gets into the

this gets into the area of

um huge Federal deficits

um a huge federal debt I think last I

saw it was like 31 trillion I think from

memory is the U.S federal debt and

enough if enough people we're not there

yet but if enough people start to

question that then you start to question

why am I owning this this stuff yeah and

that's I mean the reason that gold has

performed so well in the last probably

10 days is people are asking those

questions and and they're not hanging

around for the answer they're shifting

from from paper I mean at the end of the

day government bonds are just an IOU so

they're shifting from the ious into

something that's solid flight to safety

just how illustrative is svb signature

now credit Swiss collapse in terms of

the risk to the broader Banking and

Financial system

well well they've cauterized those

particular Banks as I say it's it's

we're getting in the into the area of

human psychology it's almost like a um a

psychologist would be able to give you a

better answer as to where this is going

to go a better answer than an analyst or

an economist because it's human

psychology now it's not it's not numbers

it's just fear when we look back to the

GFC and that some parallels there I mean

we saw Layman's fail during the JFC but

other Banks were rescued I mean did the

GFC really solve any of the problems

about risky debt or is the can just been

kicked down the road

I think the can has been very much

kicked down the road and a lot of us

have been saying that for the last 15

years

and they tried to raise interest rates I

think it was in 2019 and they only they

only tried don't talk about the US they

only tried that for about three or four

months I think the stock market fell a

quarter and then they backed right off

because they realized that what's

happened over the last 15 years is

financial players have leveraged

themselves into a zero interest rate or

even a negative interest rate policy

environment

and then and then so so we've had that

for 15 years and then last year they've

had we've had what nine or ten interest

rate Rises and that's what's causing the

pie well there are obviously differences

between now and the GFC obviously we're

not dealing with collateralized loans

and there's no obvious links to the real

economy but what about the similarities

because it's giving off the same Vibe

you've got a UBS rescuing Credit Suisse

JP Morgan rescued Beth Stearns back in

the GFC and a frantic weekend of talks

oh it's it's deja vu if you if you lived

through the GFC you you you you you're

finding it difficult to slip overnight

because it's it's exactly the same

Playbook and and the tragedy is that

we've been told for the 15 year last 15

years oh we've fixed all up all the

problems and clearly they haven't so how

can you fix those problems where does

the solutions lie

Catherine this is very very deep and I I

and I think there is an immediate

solution to this problem and the

immediate solution is probably to lower

interest rates and to start quantitative

easing again

now what that means is we've become

addicted we've become like a drug addict

where we've been we've become addicted

to Kiwi or quantitative easing we've

become addicted to zero interest rates

or even negative interest rates and

every time they try to normalize them as

we've seen in the last year then you

have all these sorts of problems that

are that are cropping up Mike Mangan

great speaking with you thanks for your

time

okay thank you Catherine

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