By Markus Rudolf
With the crisis at the American Silicon Valley Bank in 2023, the decline of the Swiss Credit Suisse in 2024 and the start of the takeover of Commerzbank by UniCredit, 10 years of relative stability for international banks appear to have come to an end. All three cases have their origins in the banking and financial crisis of 2008 to 2012 and ultimately in the collapse of Lehman Brothers. The Lehman Brothers case in 2008 plunged numerous banks into crisis, initially in Iceland and Ireland and later also in the UK and on the European continent. Entire countries and the euro had to brace themselves against their own demise by rescuing entire banking systems. Comprehensive measures were taken both in the European Union and worldwide to stabilize the banking system. Despite the years-long phase of zero interest rates, there were no significant distortions among global banks – until 2023.
Capital adequacy of the international banking system
In September 2008, the New York investment bank Lehman Brothers, founded in 1850, went under in response to the so-called subprime crisis, a real estate crisis that originated in a number of US states, particularly California, Texas and Florida. The collapse of Lehman Brothers marked the beginning of an unprecedented global financial market crisis that initially affected the global banking system and later threatened the stability of entire countries – including Iceland, Ireland, Spain and Cyprus. This crisis also represented the first serious test of the euro as Europe’s common currency.
The Lehman collapse also left deep scars in Germany. Hypo Real Estate (today: Deutsche Pfandbriefbank) was particularly affected, whose crisis led to the establishment of bad banks in Germany, including Erste Abwicklungsanstalt (EAA) and FMS Wertmanagement. As a result, the instability of the banking sector infected the entire euro system. At the height of the financial crisis, a 53.5 percent haircut of Greek government debt was implemented in March 2012 in order to restore the country’s solvency.
Germany and the EU responded to these years of financial crisis by significantly tightening regulations. A bank levy was introduced, which was initially paid into a fund of the Federal Agency for Financial Market Stabilization and has since been passed on to the European Single Resolution Fund (SRF). In addition, the Basel III rules tightened the capital adequacy requirements for banks worldwide. The core capital ratio rose from 2 percent to 4.5 percent and, together with the additional equity and the capital conservation buffer, the minimum equity ratio is now 10.5 percent of risk-weighted assets instead of 4 percent as in 2010. At the same time, the European Central Bank has created a European banking union with the Single Supervisory Mechanism (SSM) and the Single Resolution Mechanism (SRM).
In fact, the capitalization of international banks in the 2000s was historically low, as Allen N. Berger and David B. Humphrey (1997) demonstrate in their article. In the 19th century, the equity ratio of banks tended to be between 30 percent and 50 percent; only since the 1950s has competition and increasing globalization led to ever lower equity ratios for banks. And thus also to substantially higher risks. The extremely high leverage of banks until the financial crisis has been reduced by the new regulation since 2011.
The end of stability for European banks
Between 2015 and 2021, interest rates on the German capital market were around 0 percent. There has never been such a situation in post-war Europe. At the same time, the interest rate spreads of other European countries to Germany fell back below 2 percent. Even Greece, which had to impose a haircut on its debtors as recently as 2012, is once again able to finance itself on the capital market at a moderate interest rate level. The interaction between the ECB and the national and European regulators has stabilized the banking system in Europe at least until 2021, although such a low interest rate level is actually a severe test for the business model of commercial banks.
In February 2021, we experienced a sudden rise in inflation and thus also in interest rates as a result of the Russian attack on Ukraine. The business model of Silicon Valley Bank (SVB) was to take deposits from start-ups in Silicon Valley. With total assets of $800 billion, SVB was no small bank. It collapsed in a matter of days as interest rates rose because the valuations of these start-ups collapsed and they had to withdraw their deposits from SVB as a result. Within a few days, the SVB was no longer able to pay out the amounts.
At the same time, a banking drama in Europe that had emerged many years earlier came to a head. Switzerland’s Credit Suisse had been embroiled in several scandals since 2019, including the spy scandal, Greensill, Archegos, Mozambique, and many others (Pascal Böni and Heinz Zimmermann analyze this in great detail in their 2024 paper in Financial Markets and Portfolio Management). CS had a core capital ratio of over 15 percent at the time. And yet it went under in 2023. What was curious, however, was that it was not undercapitalization as in the 2000s that caused the downfall, but indirectly the collapse of the SVB. The collapse of the SVB also eroded confidence in the European banks and CS turned out to be the bank in Europe that least deserved the trust of investors. In an unprecedented procedure, the Swiss government then ordered the remaining major Swiss bank – UBS – to take over CS on terms that were adventurously advantageous for UBS from a financial point of view. However, this allowed the integrity of the Swiss financial center to be preserved – for the time being, as UBS represents an enormous cluster risk for the financial center.
However, peace then returned to the European banking system only for a short time. In September 2024, Manfred Knof, CEO of the German Commerzbank, announced his resignation. Although the bank was able to return to profitability for the first time since the financial crisis and the rise in interest rates, and although its capitalization had become quite impressive. However, the head of the German Finance Agency Eva Grundwald announced that she would reduce her 16.5 percent stake in Commerzbank, which she had acquired during the financial crisis, by 4.5 percent. At the same time, she announced that she would sell a further 4.5 percent on the open market for a total of EUR 1.4 billion. The Italian UniCredit immediately took advantage of this situation to increase its footprint in the German banking market following the takeover of Hypovereinsbank in 2009. It acquired the 4.5 percent from the German finance agency. Since then, a defensive battle has been underway at Commerzbank and its new boss Bettina Orlopp, which has attracted a great deal of public attention in Germany.
What happens next?
Claudia Buch from the ECB gave a speech at Bocconi in Milan in October 2024 on the profitability of European banks. According to her, the additional regulation since the 2010s has not harmed the profitability of European banks. On the contrary. European banks are also in a good position thanks to the increased interest margin since 2021. And yet – or perhaps precisely because of this – there is now movement in the European banking market for the first time since the financial crisis. Credit Suisse and Commerzbank could have been just the beginning. The paper by Böni and Zimmermann shows how vulnerable CS was in 2023. Acquirers from Europe or even from outside Europe (see Fosun from China, which joined Hauck Aufhäuser Lampe) are to be expected. However, German banks are more likely to be targets than acquirers due to their rising but, in international comparison, low profitability.
