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Tuesday, March 21, 2023

A US bank collapse could trigger a global crisis: “Dr. sinking economist

“Dr. Doom economist Nouriel Roubini warns that the recent collapse of the Silicon Valley Bank (SVB) poses a risk of “global contagion”.

“There is at least one financial institution in Europe that has historically been undercapitalized, had trouble recapitalizing, has some bad assets, some exposure to long-dated securities and unrealized losses,” said Roubini, who got his nickname for the 2008 prediction received financial crisis, told news week On Monday.

“If something were to happen to this institution … it would be much more systemic — we’re talking institutions with trillions of dollars in assets, not $400 billion like the SVB,” he said.

The recent chaos surrounding the SVB’s shutdown wasn’t limited to the US, Roubini noted. On Monday, European markets closed much lower, with bank shares falling 5.65 percent – the biggest drop in more than a year. The last worst day was March 4, 2022, just after Russia invaded Ukraine, when bank shares fell 6.66 percent.

Monday’s troubling numbers come after SVB suffered the second-largest banking collapse in American history last week. On Friday, federal authorities took over the Santa Clara, Calif.-based institution after a series of massive withdrawals over the course of 48 hours sparked a bank run.

As part of the fallout, another New York financial institution, Signature Bank, was shut down two days later by authorities who feared maintaining the bank could endanger the stability of the financial system.

On Monday, Europe’s Stoxx 600 index was down 2.34 percent, Germany’s DAX was down 3 percent, France’s CAC 40 was down 29 percent and Britain’s FTSE 100 was down 2.6 percent. Shares in Switzerland’s Credit Suisse hit a record low, falling more than 12 percent.

“It’s the natural lag of global contagion,” said Roubini, a former senior adviser to Treasury Department Undersecretary for International Affairs Timothy Geithner during the Obama administration. “That’s why stocks are also way down in Europe, even though they had nothing to do with it [collapse].”

While Friday’s news could turn into something bigger, Roubini stressed that it was primarily a small group of small-to-mid-sized banks that were at risk, not the entire banking system and larger banks like Bank of America or JP Morgan Chase that could go under.

He said the banks facing a possible collapse are regional banks that lack a large depositor base, have many securities that have declined in value and whose capital would be wiped out should those securities be sold at market prices.

“The run can go on,” he said. “The crisis is not over.”

After the SVB imploded, the Treasury Department and the Federal Reserve rushed into taking a series of measures that would restore confidence in the American banking system.

President Joe Biden promised SVB and Signature Bank customers Monday at the White House that they would have access to their money and that stricter banking regulations would follow.

However, Roubini said: “In a way [the feds] have already done too much” because they “fully secured and bailed out the savers”.

While Biden insisted that “no losses will be borne by taxpayers,” Roubini noted that the creation of a new Bank Term Funding Program that the Fed has opened to keep money flowing through the system will be funded by taxpayers’ money.

“To say, ‘I’m not going to tax the taxpayer, we’re going to tax the banks to raise money to fund it’ — that’s a tax and a bailout,” he said.

“Yes, there is panic and you want to stop the panic, but the lesson is that many banks have taken reckless risks,” he said. “So you have to worry about the moral hazard. If you keep saving everyone, people will take the risk because, like in the past, you are privatizing the gains and socializing the losses.”

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