In March 2023, the crisis of a handful of US banks caused turmoil in global financial markets. National governments and supervisory authorities reacted promptly, with extraordinary measures within hours. Hence, these events would not have seemed like such a big concern in those days if it had not reminded the spectrum of the 2008 global financial crisis when the world was plunged into a devastating situation caused by the collapse of the US housing market. As it is known, each bank failure has different intrinsic characteristics and can be triggered by different economic environments. In this case, the inflation and the tightening of monetary policies represented the macroeconomic causes. At the same time, uninsured financial leverage (i.e., uninsured debt/assets) appeared as an essential ratio to understand how banks can suddenly become insolvent. Immediately after these failures, some scholars (Jiang et al. 2023) demonstrated how the decline in bank asset values—due to the increase of interest rates—could significantly increase the fragility of the banking system and make it prone to runs by uninsured depositors. Building on analyzing those events, the paper investigates the differences in bank regulation and performance in the United States and EU and the possibility that banks become insolvent again. Moreover, it compares different methodologies commonly used in practice and literature to forecast bank defaults.
Regulatory and Performance Differences in US and European Banks in Light of the 2023 Failures
Giuseppina Chesini
2025-01-01
Abstract
In March 2023, the crisis of a handful of US banks caused turmoil in global financial markets. National governments and supervisory authorities reacted promptly, with extraordinary measures within hours. Hence, these events would not have seemed like such a big concern in those days if it had not reminded the spectrum of the 2008 global financial crisis when the world was plunged into a devastating situation caused by the collapse of the US housing market. As it is known, each bank failure has different intrinsic characteristics and can be triggered by different economic environments. In this case, the inflation and the tightening of monetary policies represented the macroeconomic causes. At the same time, uninsured financial leverage (i.e., uninsured debt/assets) appeared as an essential ratio to understand how banks can suddenly become insolvent. Immediately after these failures, some scholars (Jiang et al. 2023) demonstrated how the decline in bank asset values—due to the increase of interest rates—could significantly increase the fragility of the banking system and make it prone to runs by uninsured depositors. Building on analyzing those events, the paper investigates the differences in bank regulation and performance in the United States and EU and the possibility that banks become insolvent again. Moreover, it compares different methodologies commonly used in practice and literature to forecast bank defaults.
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