In an article by Nederlands Dagblad, Ivo Arnold, Professor of Monetary Economics at Erasmus School of Economics, shares his thoughts on the banking world. After the fuss about US and Swiss banks, calm seems to have returned, but has it?
With Silicon Valley Bank already toppled a while ago and a few weeks having passed since UBS acquired Credit Suisse, calm seems to have been restored to some extent in the banking world; ABN Amro and ING share prices are even slowly recovering. So, was the turmoil unjustified?
The euro area
In the Euro area, banks as a whole are in a much better position than fifteen years ago. 'It also seems that European regulators have paid more attention than their US counterparts to monitoring effective interest rate risk management by European banks. In short, this is not like 2008, when toxic credit risk had metastasised through the financial system and it was unclear how bad it was and where it was,' Arnold argues.
Still, there are places in the banking system where stress is increasing. 'Rising interest rates and turmoil in the financial and real estate sectors are making banks more cautious. That means they will extend less credit, which will reduce spending in the economy and slow economic growth. 'With an optimistic mindset, one could hope that this development will help central banks lower inflation,' the professor explained. It will be a challenge for central banks to lower inflation without creating financial instability.