Finance industry

Global chart: why financial contagion is unlikely

  • In mid-March the collapse of Silicon Valley Bank (SVB) and Signature Bank, two regional US banks, triggered heightened investor uncertainty, raising the risk of bank runs and financial sector contagion. Our assessment remains optimistic: we believe that there is a low risk that more systemically important banks will fail in the coming months, owing to emergency measures introduced by the Federal Reserve (Fed, the US central bank) and stricter capital requirements since the financial crisis of 2008‑09. 
  • This year’s bank failures were probably one-off events that can be attributed to these banks’ overexposure to interest-rate-sensitive bonds. Since 2018 small, regional US banks have not been subject to the tight capital requirements and other rules that larger financial institutions must respect. 
  • European banks are also more resilient than they were in 2008, owing to stronger euro area bank regulation and supervision, and high levels of capitalisation. Major European economies’ common equity Tier 1 ratios are all higher than in 2008 and are well above the 10.4% requirement of the European Central Bank (ECB). 
  • Banks in major emerging economies, such as Brazil and South Africa, have also raised their common equity Tier 1 ratios since the financial crisis, and these banks appear well-capitalised to weather the current financial worries. 
  • In some emerging economies, including Brazil, India and South Africa, the liquid asset ratio fell between 2009 and 2022, but these countries’ level of liquidity is still at a similar level to that of other major developed economies. We believe that high and rising interest rates will strain these economies’ ability to repay their debt. High rates will also continue to be more of an issue than concerns about financial sector contagion for banks in these economies. 
  • We maintain our view that a global financial crisis is unlikely. Massive, concerted efforts by major central banks have reassured investors in recent weeks. However, we expect volatility to persist in the coming months, notably as continued monetary policy tightening is prompting investors to re-evaluate where and how they allocate their assets.

The analysis and forecasts featured in this piece can be found in EIU’s Country Analysis service. This integrated solution provides unmatched global insights covering the political and economic outlook for nearly 200 countries, helping organisations identify prospective opportunities and potential risks.