There is “always a risk of contagion” spreading to Irish banks from crises abroad given the globalised nature of the financial system, Minister for Finance Michael McGrath has said, although the regulatory landscape has been “greatly strengthened” since the 2008 financial crisis.
The Minister was speaking on Tuesday after a deal was struck for struggling lender Credit Suisse to be taken over by its rival UBS in a deal worth more than €3 billion.
The agreement, engineered by Swiss financial authorities over the weekend amid concerns about the risk of contagion spreading through the country’s financial system, followed shortly after three midsized US banks – Silvergate, Silicon Valley Bank (SVB) and Signature Bank – collapsed, shredding nerves across global markets over the past fortnight.
Launching the Social Finance Foundation’s lending results report for 2022 at the Banking and Payments Federation of Ireland’s headquarters in Dublin, Mr McGrath said that he had briefed Cabinet on Tuesday about the “volatility that we’ve seen in the markets” over recent days.
He praised the “decisive action” taken by US regulators to contain the crisis, guaranteeing all customer deposits at the bank despite the fact that the average customer balance at SVB was $4.2 million (€3.9 million), well above the federal deposit insurance limit of $250,000.
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“Of course, in the last few days, the focus has shifted very much to the problems that Credit Suisse was encountering,” Mr McGrath said. “Again, we have seen decisive action by [Swiss] authorities in relation to the acquisition of the bank by UBS, and I believe that has helped to restore calm to the markets.”
On the threat of further contagion, he said: “Events have been unfolding very quickly, but I think we have seen a prompt and decisive response by the relevant authorities both in the US and in Switzerland. We do have a highly integrated global financial system and there was always a risk of contagion. But the bottom line is that the regulatory system was greatly strengthened, in Ireland and indeed in Europe.”
European equities have reacted well to the deal, with the Stoxx 600 banks subindex up about 10 per cent since tumbling in early trading on Monday following reports of the takeover.
Still, the events of recent days have brought back painful memories of the 2008 crisis, when national governments were forced to pay out for the risk-taking of private institutions. The Swiss government has pledged as much as 109 billion Swiss francs (€109.6 billion) to shore up Credit Suisse on top of a 100 billion Swiss francs guarantee from the Swiss central bank.
The combined €210 billion is equivalent to about a quarter of Switzerland’s gross domestic product, Bloomberg reported on Tuesday, potentially costing 12,500 Swiss francs (€12,568) for every Swiss man, woman and child.
However, most financial experts believe the final bill is unlikely to run that high.
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Asked whether much has actually changed in the decade and a half since the financial crisis, Mr McGrath said that from a capital, liquidity and policy point of view, “we are in a much, much better place than we were in the lead-up the last crisis”.
However, he said that harmonisation of EU banking rules, under the rubric of the banking union, was “a work in progress”, particularly around issues like deposit insurance.
As a member of the Eurogroup of finance ministers, he said: “I’ll be doing all I can to push that agenda because we need to ensure that we are equipped to deal with the fallout from future crises that may well emerge.”