Joy Macknight

The question of global financial stability has come to the fore following the demise of Silicon Valley Bank and Credit Suisse in quick succession. Where are the emerging points of weakness in the banking system?

The failure of two large banks with international footprints sent shockwaves through the global financial system last month. Silicon Valley Bank was the 16th largest domestic lender in the US, with Tier 1 capital of $17.5bn at the end of 2022, with operations in Bangalore, London, Beijing and Israel.

Credit Suisse was even larger, reporting $54.4bn in Tier 1, with multiple business lines and a footprint stretching from Asia to the Americas.

While these market ructions didn’t prompt a domino effect around the world like the 2007–09 global financial crisis (GFC), they have shaken confidence in the stability of the system – especially in light of increased volatility, lower liquidity and sizeable price swings in key markets, as well as surging inflation and a higher-for-longer interest rate environment.

Global overseers, such as the Financial Stability Board (FSB) and Bank for International Settlements (BIS), are looking into what can be learned from the recent financial stress events, as well as emerging vulnerabilities.

In a letter to the recent meeting of the G20 finance ministers and central bank governors, the FSB underscored vulnerabilities associated with elevated debt levels, business models based on the presumption of low and stable interest rates, stretched asset valuations, and the combination of leverage and liquidity mismatches in non-bank financial intermediation.

While pointing out that the reforms implemented since the GFC have made the banking sector as a whole better able to absorb adverse shocks, FSB chair Klaas Knot wrote: “These recent events highlight that we cannot be complacent. The speed of developments in March, the precise nature of the vulnerabilities that crystallised and the associated market reactions provide important lessons for financial authorities, including for bank prudential and resolution frameworks.”

As such, the FSB is working with the Basel Committee on Banking Supervision and other standard-setting bodies to “comprehensively draw out these lessons and the consequent priorities for future work”.

In a recent speech looking at the looming macroeconomic and financial stability risks, Agustín Carstens, BIS general manager, outlined the challenges that central banks are facing as they navigate a path between inflation and interest rate hikes, as well as the tensions between monetary and fiscal policy.

It will be important to ensure that the tightening path consistent with lower inflation is not compromised by the immediate needs of the financial sector

Agustín Carstens, BIS

According to Mr Carstens, the near-term priority – and challenge – for central banks is to restore price stability. “At the same time, central banks will need to address any further financial strains that might emerge. If a high-inflation regime sets in, the costs to price and financial stability will be too high,” he said. “It will be important to ensure that the tightening path consistent with lower inflation is not compromised by the immediate needs of the financial sector.”

He added that fiscal policy will also have to play its part. “As monetary and fiscal policy acting in tandem bring inflation under control, financial instability should subside.”

However, a recent report by S&P Global Ratings calls attention to the vulnerabilities in emerging market banking systems from tighter international financing conditions ushered in by higher-for-longer rates. The financing conditions are becoming increasingly restrictive, with rising costs and weaker liquidity especially affecting emerging markets.

In such a situation, banks’ exposure to international financing pressures can be direct, where banks have significant net external debt, or indirect, due to corporate or sovereign weaknesses linked to net external debt.

S&P Global Ratings assessed the banking systems of five emerging economies – Egypt, Indonesia, Qatar, Tunisia and Turkey, each of which it considers to be potentially vulnerable to the changes in global liquidity.

Its research suggests that Turkish banks are particularly vulnerable to negative market sentiment, increased risk aversion, reductions in global liquidity, and higher financing costs. Tunisian banks are the most vulnerable to indirect channel risks, notably due to ongoing political instability and questions over the government’s capacity to secure support from the International Monetary Fund.

Joy Macknight is editor of The Banker. Follow her on Twitter @joymacknight

Register to receive the Editor’s blog and in-depth coverage from the banking industry through the weekly e-newsletter.


All fields are mandatory

The Banker is a service from the Financial Times. The Financial Times Ltd takes your privacy seriously.

Choose how you want us to contact you.

Invites and Offers from The Banker

Receive exclusive personalised event invitations, carefully curated offers and promotions from The Banker

For more information about how we use your data, please refer to our privacy and cookie policies.

Terms and conditions

Top 1000 2023

Request a demonstration to The Banker Database

Join our community

The Banker on Twitter