The Western banking system went through a week-long rapid crisis that resulted in the collapse of three American banks with combined assets of $333 billion, including Silicon Valley Bank, which was then acquired by First Citizens. There was also a Swiss bank that fell by the wayside due to a liquidity shortage.
Some of the global banks are yet to emerge from the legacy of the 2008 Global Financial Crisis, with Credit Suisse being one even after receiving new equity support from Gulf entities – notably Saudi National Bank - as recent as last November.
Before UBS stepped in to acquire Credit Suisse, the Saudi National Bank chairman, who was later relieved of his post, claimed the bank’s investment was sound and profitable. Unfortunately, Gulf institutions suffered significant losses from the Credit Suisse exposure, running into billions of dollars.
Central banks keep priming the pump
In the US, the Federal Reserve allocated $300 billion to assist struggling banks, while the Swiss National Bank granted $54 billion to Credit Suisse. However, the latter’s efforts did not prevent the collapse of Credit Suisse and which then led to the acquisition by UBS, resulting in the write-off of $17 billion in bonds issued by Credit Suisse. This move met with significant criticism from investors.
Printing money to address the recent financial crisis is viewed by some as a temporary fix rather than a long-term structural solution. Such measures are seen as indicative of bigger structural issues inherent in the banking sector. This sentiment was echoed by prominent American investor Carl Icahn, who attributed the economic distress in the US to weak leadership and inflation, and described the economic system as collapsing.
Christine Lagarde, President of the European Central Bank, has warned of new economic risks. As a result, Moody’s downgraded its outlook on the US banking system from stable to negative.
This significantly increases risks associated with foreign investments, particularly Arab investments in Western banks and financial institutions that lack collateral. This is especially true after US Treasury Secretary Janet Yellen came across as extremely tentative in her stance on deposit guarantees, limiting them to $250,000 after previously indicating the possibility of guaranteeing them to the hilt.
Fed passes the buck
The US Federal Reserve Chairman Jerome Powell stated last week - after the decision to raise interest rates by another 0.25 per cent - that what principally matters for his institution is to reduce the rate of inflation, not the stability of the financial system, which can be ‘contained from a certain perspective’.
This confirms investor Icahn’s statement about weak economic management that could lead to new crises, as predicted by Lagarde. In addition to the structural imbalances in the financial system, the ongoing global geopolitical crises, particularly the Ukraine one, not only fail to address the financial turmoil but also exacerbate them due to a lack of economic and financial cooperation and coordination among countries with economic influence, including the US, China, the EU, Russia, and the oil-producing countries.
They currently operate live in a state of disharmony, facing sanctions, counter-sanctions, and the confiscation of funds and assets owned by both the government and private sector entities.
Most indicators suggest that more devastating financial crises are looming, which necessitates a remapping of the distribution of Arab investments to minimize losses. It is crucial to focus on internal investments, especially since the Gulf economies have recently witnessed rapid developments that have opened up many new areas of investment, including renewable energy and new-age technologies.
These areas require significant investments, while some emerging economies provide stable investment opportunities. Moreover, investments in the West will need close monitoring them to avoid the oversized risks associated with them.