Preventing a New Global Financial Crisis Amidst the Current 'Inflation Crisis' and the Spring 2023 Bank Failure Episodes

29 Pages Posted: 7 Jun 2023 Last revised: 27 Oct 2023

See all articles by Christos Gortsos

Christos Gortsos

National and Kapodistrian University of Athens; EUSFIL Jean Monnet Centre of Excellence

Date Written: October 26, 2023

Abstract

The (2007-2009) global financial crisis (GFC), which was caused by a mix of business, regulatory, supervisory, and macroeconomic (in terms of sub-optimal fiscal and/or monetary policies) failures, had a negative impact both on the financial system – with the failure, through the activation of contagious effects, of several commercial and (in the US) investment banks and their subsequent, in most cases, bail-out by public funds – and on the real sector of the economy (recession, closure of non-financial businesses, and unemployment) in several countries all over the globe. As the footprint of that crisis in the collective memory is still bold, it is inevitable that any subsequent significant banking failure episodes, such as those in the US and Switzerland as recently as during spring 2023, raise concerns of eventual conditions for a “repeat” of the GFC and its grave multidimensional (and not only economic/financial) negative consequences. This article:
• briefly develops on the significant differences between now and then as to the macroeconomic environment, the monetary policy strategies and instruments, and the adequacy of the financial regulatory framework to prevent and manage financial (and in particular banking) crises (under Section 1);
• discusses the structural vulnerability of banks to some financial risks (and in particular liquidity risk), which is intertemporal (Section 2);
• presents the causes of the recent banking failures and the measures (successfully) taken to deal with them to avoid contagious spill-over effects (Section 3 on the US and Section 4 on Switzerland);
• identifies the existing threats to financial stability amidst the current phase of the inflation crisis (Section 5); and
• identifies the areas where the financial regulatory framework could potentially be further enhanced (Section 6.1 and 6.2) – with specific emphasis on current policy-related developments in Switzerland (Section 6.3).

Keywords: Financial Turmoil, Bank Runs, 2009 Global Financial Reform Agenda, Business, Supervisory and Regulatory Failures, Credit Suisse, Write down of Additional Tier 1 Capital Instruments, Silicon Valley Bank (SVB), Signature Bank, First Republic Bank, Inflation Crisis

JEL Classification: E50, E58, F36, G01, G21, G28, G32, G33, K20, K23, K33, L80

Suggested Citation

Gortsos, Christos, Preventing a New Global Financial Crisis Amidst the Current 'Inflation Crisis' and the Spring 2023 Bank Failure Episodes (October 26, 2023). Available at SSRN: https://ssrn.com/abstract=4454997 or http://dx.doi.org/10.2139/ssrn.4454997

Christos Gortsos (Contact Author)

National and Kapodistrian University of Athens ( email )

EUSFIL Jean Monnet Centre of Excellence ( email )

Italy

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