Spring Tests the Banking System’s Trustworthiness

According to Kauppalehti’s news (KL 9.11.), the former director general of the financial market department of the Ministry of Finance Peter Nyberg has urged caution and preparedness for a potential financial crisis. While increased regulation has helped mitigate some risks, unforeseen factors can still trigger a crisis.

In response to these risks, the financial system’s ability to absorb losses has increased, and banks have become more solvent due to stricter regulation. This is especially true in the EU, where there has been a significant increase in banking regulation over the past decade. Despite not all regulations being effective, they play a critical role in maintaining financial stability and protecting consumers.

The EU banking sector is particularly resistant to economic disruptions due to its common supervision and resolution mechanism with financial arrangements. The stress test results published by the European banking supervisors in July 2023 showed that banks are able to support the economy even in a severe global recession with rising interest rates and growing risk premiums. This demonstrates the effectiveness of regulation in maintaining stability in financial markets and securing consumer protection.

The collapse of Silicon Valley Bank and Credit Suisse in March 2023 tested trust in the financial system on both sides of the Atlantic. Banks did not fail in the Eurozone due partly to stricter regulation than in other regions. The collapse of both banks demonstrated one of the most critical principles of bank regulation: bank shareholders and risk investors were not saved with taxpayer funds.

Investor responsibility is a central principle that maintains trust in the system by ensuring that individuals take accountability for their actions during crises. While there may be imperfections, this principle played an essential role in preventing market chaos and implementing investor responsibility during these events. There will always be risks, but being prepared for them is crucial for maintaining stability and security within our financial systems.

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