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Bank Crises, Globalization, and the Free Market

Published 21 May 2023
Ryan Lung

Once again, the international banking system is embroiled in a crisis largely of its own making. Familiar sights abound – ominous headlines with words like “collapse” and “takeover,” commentators grilling nervous government officials on financial news channels, and an endless stream of blood-red stock tickers running across the television screen.

The origin of the situation can be traced to the recent collapse of Silicon Valley Bank (SVB) in March. Its disclosure of bad investment decisions prompted a bank run and its successive takeover by the Federal Deposit Insurance Corporation – a U.S. government agency responsible for ensuring that depositors in banks are made whole in the event of insolvency. Since then, other regional institutions (so-called “Mid-Cap” banks) such as Signature Bank and First Republic Bank have, for similar reasons, met the same fate.

Fears that this domino effect would continue and spell disaster for the American, and therefore world economy exacerbated the anxieties of global markets even further. Around the same time, embattled multinational bank Credit Suisse was already struggling with problems of its own. Due to huge withdrawals by investors (instigated by a series of management scandals and bad investments, as always), a refusal by the bank’s top backer to give it further financial assistance, as well as a plummeting stock price, the firm faced the prospect of collapse.

Owing to the size of Credit Suisse and the importance of their operations to the functioning of the global economy, the Swiss government feared that an international financial disaster would happen if they allowed such a scenario to occur. Indeed, during the last crisis in 2008, it was only because relatively healthy banks purchased the crisis-wracked ones that the world avoided a calamitous economic meltdown. In response, Swiss regulatory authorities coordinated the acquisition of Credit Suisse by rival bank UBS, preferring the creation of an effective monopoly of the Swiss banking industry to outright nationalisation – even going so far as promising to cover much of UBS’ potential losses from the deal with taxpayer money.

Herein lies three of the central dilemmas of modern capitalism. Firstly, globalisation and resulting economic interdependence have meant that governments have repeatedly found themselves intervening to protect financial institutions from market forces to stave off a worldwide financial crisis. Secondly, there is the issue of increased risk-taking when financial institutions become accustomed to government intervention – whether in the form of guarantees, like in the scenarios discussed, or outright bailouts which occurred in 2008, a phenomenon known as “moral hazard”. Thirdly, to preserve the veneer of a free market, governments have preferred to orchestrate private (rather than public) sector takeovers of failing institutions, leading to the emergence of an oligopoly in the global financial services industry.

To be sure, the actions of both the U.S. and Swiss governments were necessary to calm global financial markets and prevent a repeat of 2008. But the stability of the international banking system has come at the expense of free market capitalism. The solution to the problem of banks that are “too big to fail” has been to allow those that are at risk of failing to be swallowed up by even larger banks. Far from being a competitive, meritocratic industry, the banking sector has become one where companies do not bear responsibility for their mistakes and consequently cannot learn from them.

All this because national economies around the world have become inextricably intertwined with each other through global financial markets. Governments are forced to take drastic measures to address crises that cannot be effectively contained otherwise because they are no longer localized. Yet it may be impossible, even undesirable, to undo economic globalisation. We must acknowledge that the internationalisation and free flow of capital comes at a cost.

Ryan Lung is a third-year student at the University of Sydney studying a Bachelor of Arts/Advanced Studies, majoring in History and English. He was previously a Research Assistant for Project Q at the Centre for International Security Studies, an initiative investigating the ethical impacts of quantum innovation. He was also a reporter for student newspaper Honi Soit, a digital media volunteer at the Royal Australian Historical Society, and a debate coach for the Independent Schools Debating Competition. His main areas of interest include American foreign policy and domestic politics, international trade, and the role of technology in international relations.

Ryan is an intern with the Australian Institute of International Affairs NSW.