- The lessons learnt from the global financial crisis have come in handy as central banks tackle the loss of confidence in the banking sector.
- The actions taken have created moral hazards but have proven worth it.
- Are we able to act the same in response to the climate crisis?
It was a crucial moment in the demise of the 166-year-old Swiss bank.
The chair of Saudi National Bank, Credit Suisse’s largest investor, Ammar Al Khudairy, said it was not able to inject further capital into the bank and that saw its stock and bond values plummet – similar to the run which eventually did it for Silicon Valley Bank (SVB).
“There’s no surprises like you would have in a middle-sized bank in the US. It’s a completely different ecosystem,” Al Khudairy said.
Except it wasn’t. The end of Credit Suisse (CS) was precisely because it was part of the same ecosystem; just one that Al Khudairy couldn’t see. It’s an ecosystem connected by the fast flow of information, where individuals act on sentiment and en masse.
Irrational to be rational
You can rationalise all you want on the very obvious differences between a multinational investment bank and asset manager, and an influential but niche US commercial bank. But the “market” connected the weak asset liability management of SVB to the sustained poor performance and woeful governance of CS, and – being very jittery about contagion risk – decided to jump what felt like very similar ships.
Hardened by the painful lessons learnt from the global finance crisis, regulators, governments and central banks may have been caught off guard by the suddenness of the situation, but they were prepared for how to deal with it.
The response – a coordinated promise of heaps of capital combined with some severe government arm-twisting – appears to have averted a more severe crisis from unravelling.
Paying depositors more than they are guaranteed, treating bondholders subordinate to shareholders and possibly pushing UBS into a new “too enormous to fail” systemic bracket will require some explaining, but cauterising the financial bleeding will hopefully justify the moral hazards created.
And to that, we can see how important institutional memory really is. No one wants to go through 2008 again, but unless we unilaterally legislate to kill off all risk-taking, we will always encounter the consequences of someone’s poor risk management. If our institutions are able to mitigate the worst excesses of the few – and the few are suitably punished – then we have a fighting chance of muddling through a crisis uncrippled.
Climate: whose ecosystem are we in?
Even though we haven’t reached the backslapping stage of this current crisis, there is good reason to believe we will get there. And when we do, it might be worth pausing to reflect on Al Khudairy’s remarks about ecosystems. What exactly do we mean by an ecosystem and how interconnected are they to each other?
One ecosystem overshadowed by the recent banking failures in the US and Europe is our climate. And it’s one that’s far more closely entwined with our financial markets than many care to believe. The IPCC’s comprehensive synthesis report, which came out on 20 March, lays bare what is now required to limit global temperature rises to 1.5C and prevent a climate crisis.
The report reads: “Some future changes are unavoidable and/or irreversible but can be limited by deep, rapid and sustained global greenhouse gas emissions reduction. The likelihood of abrupt and/or irreversible changes increases with higher global warming levels….
“If climate goals are to be achieved, both adaptation and mitigation financing would need to increase many-fold. There is sufficient global capital to close the global investment gaps but there are barriers to redirect capital to climate action.”
The IPCC parks a lot of the responsibility on governments to coordinate more effective ways to lower the financial barriers that it references, arguing that an alignment of public capital is needed to reduce the risk-return profile of investments in carbon-free or carbon-reduction technology.
No matter what way you slice the findings, the conclusion is clear. If we’re not prepared to spend an awful lot of money now to keep temperatures down, we’re going to have to spend an awful lot more in the near future to tackle violent and unpredictable climate ecosystems that will kill and displace millions.
It would be nice if we didn’t have to go through the environmental equivalent of the 2008 financial crisis to show the level of solidarity that has been seen from world leaders in the past few weeks. Perhaps a better understanding of what we mean by ecosystem and who is part of it could help us achieve that.[Read more: The policy wish list to avoid climate catastrophe]