[Bankdemic One Month]② US and Europe Focus on Early 'Bankruptcy Contagion' Prevention Measures

Blocking Controversy Over 'Daemabulsa' Using Private Capital

Editor's NoteThe global bankdemic (bank + pandemic), which started with the Silicon Valley Bank (SVB) in the United States, toppled Credit Suisse (CS) in Europe, and shook Deutsche Bank, is approaching its one-month mark. Although the three banks share the common denominator of being caught in the whirlwind of a sudden crisis spreading like an infectious disease, each showed different aspects regarding the fundamental causes and responsibilities of the crisis. While the betrayal of safe assets amid high interest rates is cited as the fundamental cause of the bankdemic, insufficient internal controls, the spread of irrational fear, and ultra-fast bank runs through mobile banking also exacerbated the situation. However, the fact that characteristic phenomena such as real-time bank runs and irrational market fear occurred commonly and rapidly brought down the banks left an impression similar to the spread of an epidemic. Although the transmission of the crisis seems to have stopped due to swift responses by various countries, it is still too early to be complacent. Jamie Dimon, CEO of JP Morgan Chase, known as the 'Emperor of Wall Street,' warned in his annual shareholder letter released on the 4th (local time) that the recent banking crisis is not over. It is expected to have repercussions across the economy for the coming years.

Governments around the world facing the bankdemic acted very differently from previous crises, from diagnosis to response. The United States quickly assessed the situation and contained the spread of the crisis within the banking sector, while also utilizing private capital to prevent controversy over 'too big to fail.' In Europe, including Switzerland and Germany, which the bankdemic swept through after the U.S., each country succeeded in preventing the transmission of the crisis in its own way. This contrasts with the 2008 financial crisis, when the U.S. government and financial authorities failed to anticipate the possibility that Lehman Brothers' bankruptcy could trigger a chain reaction of bankruptcies among other companies.

U.S.: Swift Measures and Private Sector Support

Responses to the bankdemic by various countries were very rapid and focused on preventing a chain reaction of crises. The U.S. government quickly recognized early on whether the bankruptcy of Silicon Valley Bank (SVB), the 16th largest U.S. bank with assets of $109 billion (approximately 277 trillion KRW), was a problem unique to SVB or a widespread issue within the banking system, and launched an all-out effort to suppress it early. While Lehman’s bankruptcy 15 years ago stemmed from toxic assets related to subprime mortgages, this crisis fundamentally differed as it was caused by asset structures vulnerable to high interest rates.

[Image source=Reuters Yonhap News]

U.S. authorities swiftly announced an extraordinary measure guaranteeing all deposits just three days after the crisis erupted. This was intended to preemptively block the possibility of the financial system-wide crisis triggered by the spread of fear due to borrowing risks from high interest rates and recession anxiety caused by inflation.

In particular, when the SVB crisis broke out, President Joe Biden held an emergency weekend meeting with the Federal Reserve (Fed), the Treasury Department, and others. Through this, they introduced bold measures to preserve all deposits and supply additional liquidity to the banking sector, quickly suppressing the spread of bank runs (massive deposit withdrawals). This contrasts with President George W. Bush’s more relaxed approach during the financial turmoil surrounding Lehman’s bankruptcy filing, such as holding a press conference with the President of Ghana and maintaining scheduled events.

It is also notable that the U.S. government avoided public criticism of 'too big to fail' by pressuring large private banks without using public funds. The U.S. government persuaded large banks to agree to support SVB through Jamie Dimon, Chairman of JP Morgan Chase. Through this, the Federal Deposit Insurance Corporation (FDIC) covered the $23 billion cost to protect SVB’s deposits totaling $128 billion (approximately 167 trillion KRW) by raising deposit insurance fees on these banks. SVB was ultimately resolved through acquisition by First Citizens Bank.

In contrast, a different response was taken during the 2008 financial crisis. The Bush administration declared that public funds would not be used to rescue Lehman, and on September 14 of the same year, Lehman immediately filed for bankruptcy protection in the U.S. Bankruptcy Court for the Southern District of New York. During the transition period between administrations, the old and new powers engaged in exhausting debates over whether to provide bailouts, only increasing confusion.

Subsequently, the Barack Obama administration, inaugurated in 2009, poured massive bailout funds to contain the financial crisis belatedly. This eventually suppressed the chain collapse of the financial system. However, due to moral hazard, there was fierce criticism that taxpayers’ money was injected because of the 'too big to fail' doctrine even when institutions were in crisis, and public anger was directed at the government. While Wall Street banks, the root cause of the crisis, were bailed out by the government, ordinary financial consumers suffered widespread losses of jobs, homes, and savings due to the chain reaction.

[Image source=Reuters Yonhap News]

Europe Also Contained Transmission Through Early Suppression

The liquidity crisis at Credit Suisse (CS), which spread to Europe, was overcome through a merger with its rival UBS. With Swiss government mediation, Switzerland’s largest bank UBS acquired CS for 3 billion Swiss francs. To block the shockwave that the bankruptcy of CS, with a market capitalization of $8 billion, would have on the global financial market and to restore confidence in the Swiss banking system’s stability, authorities completed the merger at ultra-fast speed within just two days before Asian markets opened. In this process, shareholder approval procedures were also skipped, and unprecedented support measures were taken, including providing liquidity or financial guarantees that could arise during the integration of the two companies.

Following Switzerland, the crisis rumors spreading to Germany were suppressed by Chancellor Olaf Scholz. When Deutsche Bank’s credit default swap (CDS) premiums soared to their highest levels, Chancellor Scholz unusually defended the private bank directly, stating, "Deutsche Bank is fundamentally different from CS." Christine Lagarde, President of the European Central Bank (ECB), also supported this by saying, "Eurozone banks are well-capitalized, liquid, and resilient." As analyses emerged that Deutsche Bank was financially sound, the crisis was contained early.