Banking crisis: worries about trust
Analysis of the current crisis of confidence in the banking sector and its impact on the markets

The financial markets have been extremely nervous in recent days due to the crisis of confidence in the banking sector. The recent collapses in the banking sector have led to the question of what contagion risk still emanates from these problems. However, some experts claim that Europe cannot be directly infected by the problems of some regional institutions in the USA, as there are hardly any business links with these institutions. However, the real danger lies in the basis of any banking business, namely the confidence that financial institutions can meet their obligations at any time.
Credit Suisse's problems are a direct result of the turmoil in the USA. The major Swiss bank had already been struggling for years with home-grown problems that could no longer be controlled in view of the current crisis of confidence. It was also typical that the once-proud financial institution had only recently admitted to "significant weaknesses" in its internal financial controls. This brought back fresh memories of the 2007/08 financial crisis to the markets.
Deutsche Bank and Commerzbank stressed that they hold almost no and no Credit Suisse Additional Tier 1 (AT1) bonds, respectively. AT1 bonds are a new asset class created after the financial crisis to provide better protection for institutions in times of crisis. However, confidence in this young market is being permanently shaken by the current precedent. The action of the Swiss financial regulator Finma will harm CoCo bonds issued by other banks in Europe, but will also make refinancing and the cost of capital for institutions more expensive in general. Market participants should therefore be prepared for further surprises at any time.
Policymakers have been aware since the past financial crisis that the confidence factor remains crucial for developments in the days and weeks ahead. The swift and radical intervention to bail out Credit Suisse and the concerted action by central banks show how determined policymakers are to nip contagion effects in the bud this time. "If a match is lit somewhere, the fire trucks will come," Robert Halver, chief analyst at Baader Bank, commented on the new strategy to ARD.
Crucial for the coming days and weeks is the development of the trust factor. Officials on both sides of the Atlantic emphasize that banks' crisis resilience has improved significantly since the financial crisis. The euro area banking sector is resilient and has a strong capital and liquidity position. The German banking system is "well positioned." The financial supervisory authority BaFin also stated that the German financial system is "stable and robust."
The banking crisis will therefore remain an issue for a while and is likely to continue to weigh on the markets. It is therefore important that political leaders continue to act decisively and ensure transparency in order to restore investor confidence in the banking sector. Comprehensive financial sector reform and a strengthening of supervisory authorities and regulation are essential to this end. It remains to be seen how the situation will develop in the coming weeks and months, but one thing is certain: banks must do their homework and adapt their business models in order to be successful in the long term and regain investor confidence.





