The 2022-23 Economic Crisis Megathread

[Sheilbh]

Obviously not the same as 2008 - but can't help but have slight flashbacks with the ECB simultaneously warning some European banks are in a similar position as Credit Suisse and hiking rates

[Tamas]

Obviously not the same as 2008 - but can't help but have slight flashbacks with the ECB simultaneously warning some European banks are in a similar position as Credit Suisse and hiking rates

Well what is the option? Let inflation rise to avoid the more reckless/incompetent banks to get into trouble? Why, they will be just bailed out anyhow.

[Sheilbh]

Well what is the option? Let inflation rise to avoid the more reckless/incompetent banks to get into trouble? Why, they will be just bailed out anyhow.

Eurozone inflation - like inflation in the UK and US - is (slowly) falling. It peaked at 10.1% in November and is now down to about 8.5% (although still very different country to country - so I think it's still peaking in France primarily through food costs because France was far less exposed on energy cost inflation).

Edit: So get it's still rising - but going in the right direction and I'm not sure risk slightly vague risk understanding of the risk in the Eurozone financial sector outweighs another rate rise.

I think the next rate decision is early May so I'd just pause and just spend a bit of time in the weeds with Eurozone banks given that there's a relatively big European (but non-EU) bank in trouble and you've said Eurozone banks could be vulnerable too.

[grumbler]

They did all right in their salaries and bonuses before the shit hit the fan. The phrase, again as I understand it, is upper management reaps the reward of higher risk knowing that any fallout will be covered by the public at large.

Higher management works for the shareholders, who in this case were pretty much wiped out.  The shareholders are actually the ones reaping the rewards of higher risk knowing that they will take a haircut or get wiped out by the fallout.

Is there an incentive for the execs to pursue short-term gain over long-term prosperity?  Yes, the same as any other company.  The public takeover of a bank doesn't represent the execs "doing pretty well," given that one of the things that evaporates is their job.

[crazy canuck]

Higher management works for the shareholders, who in this case were pretty much wiped out.  The shareholders are actually the ones reaping the rewards of higher risk knowing that they will take a haircut or get wiped out by the fallout.

Is there an incentive for the execs to pursue short-term gain over long-term prosperity?  Yes, the same as any other company.  The public takeover of a bank doesn't represent the execs "doing pretty well," given that one of the things that evaporates is their job.

It's a quaint and outdated thought that the management suite and board work for shareholders.  It has never been accurate to say that shareholders make decisions regarding risks the company should take, or not.

[mongers]

This year sees the 100th anniversary of the 1923 hyperinflation. 

[Tamas]

On regulation, seems like US regulation is far lax on this topic than European:

The US banking regulation and accounting frameworks have some pretty big flaws.
Yep, you read that right.

1.      Banks with a balance sheet below $250 bn can act a lot like cowboys...
No need to adhere to NSFR (Net Stable Funding Ratio), a rule that forces large banks to have a good proportion of their liabilities in sticky, long-term funding which limits liquidity risks.
No need to adhere to LCR (Liquidity Coverage Ratio): ''small'' banks can buy a disproportionate amount of less liquid securities like corporate bonds or mortgage-backed securities instead of Treasuries.

The problem is that a $249 bn balance sheet bank is not small.
For reference, a top 3 German bank has a balance sheet of less than $200 bn – seriously, top 3 in Germany.

This lax regulatory treatment for ''small, but not so small'' banks is very dangerous.

2.      Even large banks booking bonds in HTM are disincentivized (!) to hedge interest rate risks
HTM = friendly accounting: book bonds there, forget about them as they are valued at amortized cost.

Prudent risk management still suggests you should hedge interest rate risk.
Yet, US accounting rules disincentivize interest rate hedging for HTM bonds – nuts.

But the cherry on the cake...

3.      No proper interest rate risk stress testing (!!!)
Guys, this is out of this world.

As we will discuss, Europe has a quite extensive framework to stress test the interest rate risk that European banks take on their aggregate balance sheets (the net exposure deriving from loans, mortgages, bond investments, bond issuance, long-term liabilities and swaps).

It's called IRRBB (Interest Rate Risk in Banking Books) stress-testing.

The US equivalent? It doesn't exist!
Here is the IMF calling US regulators out on the topic:



Please take a second to reflect on how bad this is.

''Small'' US banks are subject to much laxer regulatory requirements.

But even large US banks are disincentivized from hedging rate risk on HTM bonds and even worse they are not subject to extensive stress testing on the overall interest rate risk they run on their balance sheets.

Europe has much tighter regulatory standards and accounting framework, and yet the panic seems to be spreading there too.

[HVC]

All else aside, German banks must be tiny or heavily skewed to the top 2.

[Zanza]

There are nine banks with a balance sheet of more than 200 bn USD in Germany, five private, four public.

[HVC]

So now I don't know if this guy is trustworthy.

[Zanza]

So now I don't know if this guy is trustworthy.

I feel that information that can be googled in a minute should be correct if you want to convince people.

[Tamas]

So now I don't know if this guy is trustworthy.

I like him. He used to be Head of Investments for a $20 billion portfolio for ING Germany, funnily enough.

[mongers]

Panic in Switzerland, UBS planning to take over Credit Suisse by the start of trading on Monday morning.

The Swiss government has just held an emergency meeting tonight.

[celedhring]

There are nine banks with a balance sheet of more than 200 bn USD in Germany, five private, four public.

Spain has 4 banks above that figure too. Of course if any of them were to fail it would wreak havoc in our financial sector.

[Josquius]

Curiously the chf is holding steady