The latest banking crisis appears to be contained and financial regulators in the US and in Europe have reacted swiftly, although differently, to the collapse of Silicon Valley Bank (SVB) and emergency support from the federal authorities for other US regional lenders.
The Swiss government has forcibly merged the failing Credit Suisse into the larger Union Bank of Switzerland, leaving the country with just one dominant bank.
The subordinated bondholders of Credit Suisse have been cleaned out to the tune of €17bn, while the equity shareholders are to get a modest €3bn or so, about one-sixth of where the shares were trading a year ago.
The European Central Bank (ECB)is not happy: it feels that Credit Suisse shareholders should have taken the full hit as happened here in Ireland, where the same ECB supported full payment to preferential bondholders at the expense of Irish taxpayers.
Switzerland is not in the eurozone, so need not abide by the ECB’s structures.
Whatever about the failures of European, and most spectacularly Irish, regulators in the years leading up to the financial crash of 2008, the Europeans have come out of this latest crisis looking better than their US counterparts.
US regulators have tightened the rules for the big national banks but smaller and regional lenders were afforded more rope.
SVB was a specialist bank lending to the tech sector, including startups, but was also permitted to chase yield in the Government bond market.
Bigger banks were subject to tighter rules. SVB management used surplus deposits to buy long-dated government bonds which offer better yields.
The smart money, expecting yields to rise and bond prices to slide, had taken well-publicised short positions in the bond market since the middle of last year, the shorts got it right, SVB got caught and went bust.
A commercial bank funded mainly through flighty deposits chose to tie up the asset side of the balance sheet in volatile bonds, visible to all. This was down to poor management but also to slack regulation.
So far as anyone can tell, there should not be a repeat in Europe, at least not from the same source.
European banks, including the main surviving Irish ones, have better capital buffers, more cautious lending policies and better supervision than was the case during the bubble. But they are exposed, inevitably, to the health of their customers in mainstream lending and will suffer if there is a serious downturn, including higher loan defaults in areas like real estate.
A regime of higher interest rates means greater risk of financial stress for banks with highly leveraged customers.
In the US, concerns are now focused on mid-size banks and there could be more casualties.
The authorities are on full alert and willing to intervene but there is a segment of the finance industry with more opaque exposure to credit risk than the regulated commercial banks.
Monetary hawks are more concerned about a wage-price spiral getting established and worry that the eventual cost of delay could escalate
In Europe, there should also be concern about financial intermediaries, including some State-supported institutions, which lend to customers whose credit-worthiness is unclear and which will worsen as interest rates rise.
Commercial real estate companies have enjoyed a period of low borrowing costs and their access to credit is likely to suffer as market nervousness intensifies.
Are there unacknowledged risks hiding in the undergrowth, in the non-bank sectors in European countries too?
Inflation rates on both sides of the Atlantic may be over the worst but there can be no guarantees. All of the major central banks have an inflation target of 2%.
No government has announced the relaxation of this target and the chosen instrument is tighter monetary policy.
The Federal Reserve, America’s central bank, will have announced its interest rate decision on 22 March and the popular expectation at the time of writing is a further increase of 0.25%. The ECB, which has been slower than the Fed to tighten monetary policy through the current cycle, has scheduled its next meeting for 4 May and a further increase had been expected before the banking rescues of the last fortnight.
Wholesale base rates in the eurozone are currently just over 1% below the US figure and the gap will widen if the Fed announces another hike on 22 March.
There has been agitation for some time among the ECB doves against too rapid a monetary tightening, since it could tip the European economy into recession.
Monetary hawks are more concerned about a wage-price spiral getting established and worry that the eventual cost of delay could escalate.
They point to evidence of resilience in the economic data.
The doves will now have an extra argument – financial markets are less robust than they appeared a couple of weeks ago, the resilience could be fragile and the case for further interest rate increases has been weakened.