Greeks queued outside banks as they reopened three weeks after closing to stop the system from collapsing in 2015. Image: REUTERS/Yiannis Kourtoglou
Explore and monitor how Financial and Monetary Systems is affecting economies, industries and global issues
Get involved with our crowdsourced digital platform to deliver impact at scale
Stay up to date:
Financial and Monetary Systems
Listen to the article
- Fears of contagion appear to be contained, but banks remain under scrutiny.
- Failures and panics have been fairly common in recent history, despite the vital role banks play in daily life.
- Decisions made about how to resolve failures can be crucial for maintaining confidence.
Here’s one certainty about banks: there seem to be fewer around these days.
In the US, the number of banks declined by about 86% between 1921 and 2020, through a series of booms, busts, and cleanups. The bank population in Europe declined by roughly a third between 2009 and 2020, a shakeout stirred by the region’s own chain-reaction crisis and weakened profitability.
In some ways these numbers reflect how we choose to perceive and manage risk. Daily existence generally depends on buying things; when your bank disappears, that ability is suddenly called into question. It’s pretty fundamental.
Yet, we frequently fail to see disaster coming. Rising interest rates of the kind endured recently can be like swinging a wrecking ball through a financial system. A slackening of regulation may also portend trouble.
Even relatively sophisticated market observers get caught off guard, though. The recent emergency sale of Credit Suisse came just a few months after the Swiss bank’s biggest investor expressed backhanded confidence in it as “a 160-year-old brand.” In fact, it lasted 167 years.
The disappearance of a logo and branches doesn’t mean the wealth and investments that an institution manages necessarily vanish. What’s left behind is generally lumped into other lenders. Following Credit Suisse’s orchestrated merger with a cross-town rival, the combined bank now expects to have $5 trillion in invested assets – an amount substantially bigger than Germany's GDP.
Smash-ups, frozen funds and insured deposits
Bank panics and failures have a long history around the world.
Last summer, a “smash-up” among rural lenders in China led to some freezing funds normally available to depositors, at least temporarily. In 2015, Greece had to shut its banks for a few weeks to avoid collapse.
During the financial crisis several years earlier, nearly every Friday afternoon brought announcements of US bank failures, prompting an increase in the maximum deposit amount the government will insure.
Nearly a couple of decades before that, a bumpy transition out of communism in the Czech Republic saw the number of banks there jump from five to 55 in a half-decade, then slip back down to 40 a few years later after a string of failures.
In 1931, the collapse of the Vienna-based Kreditanstalt helped turn an American financial crisis into a global depression, and set the stage for worse to come. The bank had been founded a year before Credit Suisse (which at that point also went by the name “Kreditanstalt”), and was similarly ushered into a government-arranged merger.
Depositors at Credit Suisse were protected as part of its sale, but investors in about $17 billion-worth of the bank’s debt – securities designed to provide higher returns but less certainty – were wiped out. That’s stirred anxiety.
Regulators always face difficult choices when they step in to pick up the pieces. Calls on who gets a helping hand and who doesn’t are closely scrutinized, and for good reason; they can drain essential confidence and profoundly damage public trust.
Anger at the inequitable ways the US financial system was righted after the crisis a decade-and-a-half ago spawned serious unrest. A squalid tent city of protestors formed in front of the San Francisco Federal Reserve Bank around the corner from my office at the time, drawing a contrast with the dumbfounding amount of wealth stored in the building’s basement.
It’s probably good to keep in mind that the people running banks are as fallible as anyone else. The decisions made to clean up their mistakes must be as fair and transparent as possible – particularly amid something now being referred to as a “sentiment contagion.”
More reading on banking instability and failures
For more context, here are links to further reading from the World Economic Forum's Strategic Intelligence platform:
- Bank failures may not threaten most deposits, according to this piece, but they do threaten jobs. (Institute for New Economic Thinking)
- “Banks are vulnerable by design, not by mistake.” Looking for culprits like greedy speculators and listless regulators when a bank fails doesn’t make for good policy, according to this piece. (Project Syndicate)
- “Another opportunity to fix a still-broken banking system.” Moral hazard is back, according to this analysis. (CEPS)
- When yet another big lender in Europe came under scrutiny after Credit Suisse, the situation spurred EU financial authorities to look for more ways to cooperate across borders, according to this piece. (LSE)
- Of the 563 bank failures in the US since 2001, in 522 instances all (or nearly all) account deposits were simply moved to a new bank, according to this analysis – which ponders a significant tweak in related regulation. (Next City)
- One under-appreciated fact, according to this piece: when central banks try to invigorate an economy with “quantitative easing,” they also jack up the number of uninsured bank deposits that are more prone to runs. (Project Syndicate)
- Among the “seven likely consequences” of the current banking upheaval, according to this rundown: it’s probably going to become a lot harder to get a loan. (The Conversation)
Don't miss any update on this topic
Create a free account and access your personalized content collection with our latest publications and analyses.
License and Republishing
The views expressed in this article are those of the author alone and not the World Economic Forum.
More on Financial and Monetary SystemsSee all
March 1, 2024
Karin Strohecker, Jorgelina Do Rosario and Libby George
February 26, 2024
February 23, 2024
February 21, 2024
Stephen Hall and Rebecca Geldard
February 19, 2024
February 16, 2024