This article was originally published in Kauppalehti on June 5, 2023‍.

Silicon Valley Bank, Signature Bank, First Republic, Credit Suisse. This spring, the world economy has been shaken by four bank failures in succession. These have impacted on investors’ confidence in the sector, causing many banks’ share prices to nosedive during the spring.

So what actually happened in March 2023?

The key cause of the situation was the banks’ risk concentrations – higher interest rates and bank runs brought their problems bubbling to the surface. In the United States, where small banks are regulated very differently to Europe, Silicon Valley Bank’s problems undermined investors’ and savers’ confidence in other small and mid-size banks. In Europe, Credit Suisse’s long-term problems toppled the bank, prompting investors to take a more sceptical view of the sector.   

These particular problems where not entirely unexpected. 

For example, Silicon Valley Bank had almost solely focused on tech start-ups in Silicon Valley, investing its fast-growing deposit funds in bonds with low nominal interest rates. However, SVB had not hedged against unusually rapid rises in interest rates and a downturn in deposits. The resulting bank run quickly led to insolvency. Credit Suisse’s problems have been longer-term – large banks in Europe and the US have been markedly reducing their counterparty risks with the bank for years.

So what would prevent the same happening in Finland?

Europe’s banking sector is largely stable due to tightening regulation and supervision going back years. The financial crisis of 2008 stemmed from risky lending by banks in the US. However, there was one good outcome: banks were required to become more transparent about risk-taking, strengthen their capital adequacy and grow their liquidity (assets quickly convertible into cash, if needed). 

Although rapidly rising interest rates have exposed some unexpected flaws in banks like Silicon Valley Bank, rising rates tend to have more positive than negative impacts on banks in general. This is particularly true in a country like Finland, where loans are chiefly tied to rapidly updated, short-term reference interest rates.

The Finnish banking sector is in good financial shape and could withstand worse turbulence, if necessary. Finnish banks and their capital adequacy are supervised by the European Central Bank (ECB) as well as the Finnish Financial Supervisory Authority. The ECB has stressed that it is not worried about European banks, even if interest rates continue to rise.

Strong capital adequacy, liquidity and consumer and private-sector confidence are particularly valuable during turbulent times. OP Financial Group’s capital adequacy is amongst the strongest in Europe: our CET1 ratio was 18.3 per cent at the end of March, exceeding the minimum regulatory ratio by 6 percentage points. In addition, our liquidity was excellent. 

It is good that problems affecting individual banks, and the root causes of such problems, are being assessed. This ensures that frailties are eliminated and banking services are stable and safe for everyone – in the future as well as now.