LONDON — Turbulence across the banking sector has prompted the question of whether we are teetering on the edge of another financial crash, 2008-style. But a banking crisis today would look very different to 15 years ago thanks to social media, online banking, and huge shifts in regulation.
This is “the first bank crisis of the Twitter generation,” Paul Donovan, chief economist at UBS Global Wealth Management, told CNBC earlier this month, in reference to the collapse of Credit Suisse.
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Shares of Credit Suisse dropped on March 14 after “material weaknesses” were found in its financial reporting. The news started a tumultuous five days for the lender, which culminated in rival Swiss bank UBS agreeing to take over the beleaguered firm.
“What social media has done is increase the importance of reputation, perhaps exponentially, and that’s part of this problem I think,” Donavan added.
Social media gives “more scope for damaging rumours to spread” compared to 2008, Jon Danielsson, director of the Systemic Risk Centre at the London School of Economics, told CNBC in an email.
“The increased use of the Internet and social media, digital banking and the like, all work to make the financial system more fragile than it otherwise would be,” Danielsson said.
Social media not only allows rumors to spread more easily, but also much faster.
“It’s a complete gamechanger,” Jane Fraser, Citi CEO, said at an event hosted by The Economic Club of Washington, D.C., last week.
“There are a couple of tweets and then this thing [the collapse of Silicon Valley Bank] went down much faster than has happened in history,” Fraser added.
Regulators shuttered Silicon Valley Bank on March 10 in what was the biggest U.S. bank collapse since the global financial crisis in 2008.
While information can spread within seconds, money can now be withdrawn just as quickly. Mobile banking has changed the fundamental behavior of bank users, as well as the optics of a financial collapse.
“There were no queues outside banks in the way there were with Northern Rock in the U.K. back in [the financial crisis] — that didn’t happen this time — because you just go online and click a couple of buttons and off you go,” Paul Donavan told CNBC.
This combination of quick information dissemination and access to funds can make banks more vulnerable, according to Stefan Legge, head of tax and trade policy at the University of St. Gallen’s IFF Institute for Financial Studies.
“While back in the day, the view of people lining up in front of bank branches caused panic, today we have social media … In a way, bank runs can happen much faster today,” Legge told CNBC in an email.
Stronger balance sheets
The European Union made huge efforts to shore up the zone’s economic situation in the aftermath of the financial crisis, including the founding of new financial oversight institutions and implementing stress testing to try to foresee any difficult scenarios and prevent market meltdown.
Risk in the banking system today is significantly less than it has been at any time over the last 20 or 30 years.Bob ParkerSenior Advisor at International Capital Markets Association
This makes it “unlikely” that European banks will undergo anything as serious as in 2008, Danielsson told CNBC.
“[Bank] funding is more stable, the regulators are much more attuned to the dangers and the capital levels are higher,” Danielsson said.
Today banks are expected to have much more capital as a buffer, and a good metric for measuring the difference between today’s financial situation and 2008 is bank leverage ratios, Bob Parker, senior advisor at International Capital Markets Association, told CNBC’s “Squawk Box Europe” last week.
“If you actually look at the top 30 or 40 global banks … leverage is low, liquidity is high. Risk in the banking system today is significantly less than it has been at any time over the last 20 or 30 years,” Parker said.
The European Banking Authority, which was founded in 2011 in response to the financial crisis as part of the European System of Financial Supervision, highlighted this in a statement about the Swiss authorities stepping in to help Credit Suisse.
“The European banking sector is resilient, with robust levels of capital and liquidity,” the statement said.
Problematic pockets within the sector
Individual players can still run into difficulties however, no matter how resilient the sector is as a whole.
Parker described this as “pockets of quite serious problems” rather than issues that are ingrained across the entire industry.
“I actually don’t buy the argument that we have major systemic risk building up in the banking system,” he told CNBC.
Fraser made similar observations when comparing the current banking system with what happened in 2008.
“This isn’t like it was last time, this is not a credit crisis,” Fraser said. “This is a situation where it’s a few banks that have some problems, and it’s better to make sure we nip that in the bud.”
Trust is key
One parallel between the 2008 crisis and the current financial scene is the importance of confidence, with “a lack of trust” having played a big part in the recent European banking turmoil, according to Thomas Jordan, chairman of the Swiss National Bank.
“I do not believe that [mobile banking] was the source of the problem. I think it was a lack of trust, of confidence in different banks, and that then contributed to this situation,” Jordan said at a press conference Thursday.
If trust is lost, then anything can happen.Stefano RamelliAssistant professor in corporate finance at the University of St. Gallen
Even as banks have enhanced their capital and liquidity positions, and improved regulation and supervision, “failures and lack of confidence” can still occur, José Manuel Campa, the chairperson of the European Banking Authority, said last week.
“We need to remain vigilant and not be complacent,” Campa told the European Parliament during a discussion on the collapse of Silicon Valley Bank.
Trust and confidence in the system is a “fundamental law of finance,” according to Stefano Ramelli, assistant professor in corporate finance at the University of St. Gallen.
“The most important capital for banks is the trust of depositors and investors. If trust is lost, then anything can happen,” Ramelli said.