“Freeze” or even slow down the growth of interest rates, advises the Fed and ECB adviser to Partners Group, former head of the International Banking Association Charles Dallara speaking with “K” expresses concern about the possibility of a recession, which will increase the risks in banks. He believes the US should have handled the recent financial crisis differently, stressing that SVB bonds could cover more than 70% of outstanding deposits from the guarantee limit. He also criticizes Switzerland for not covering AT1 bondholders, as opposed to shareholders, in the Credit Suisse case. Asked to describe the hours of Greek debt restructuring negotiations, he singles out the role of Lucas Papademos and loathes the initiators of the proposal to include the Acropolis and the Parthenon as a guarantee of Greece’s salvation.

“I think we still face some risks of vulnerability and instability. This is, of course, a reflection of the impressive speed with which central banks are raising interest rates. If we look at Silicon Valley Bank in the US and Credit Suisse in Switzerland, we can argue that these were relatively special cases, either due to failures in risk management or poor performance associated with chronic problems. However, the fact remains that we have never seen interest rates rise so fast before. I believe that the Fed and the ECB have been slow to start the process, and now this rate of increase will cause problems in the market, significantly increasing the risk of a recession.

“Undoubtedly, central banks are in a difficult position. But they got into this position because they waited too long before starting to tighten monetary policy. Unfortunately, they will definitely have to continue raising rates, but I think the pace should be very soft and deliberate. This is a good time to either “freeze” or even slow down rate hikes so they can assess the upcoming financial landscape before continuing down this path. Of course, inflation should also come down. But there are many factors that keep it on top. Some of them are structural in nature, while others are not as subject to the influence of central banks, such as energy prices or food availability and prices.

– Apparently, the American authorities are concerned about the risk of infection of the rest of the financial system. However, I personally am not convinced that absolutely all deposits should have been guaranteed. SVB held bonds that could be used to cover the balance of deposits in excess of the guarantee limit. It is estimated that they could pay out more than 70% of the amount of deposits outstanding by the guarantee limit. For me, that would be a more balanced approach. Because right now there is a lot of uncertainty in the US banking system about how depositors will be treated in the event of another banking shock.

“It was a special case in the sense that his business model had gone astray from profitability. In the past two years, he has been experiencing mounting losses, along with other problems. The Swiss system remains strong, although the authorities have now raised the issue of how AT1 bonds will be treated in the future – they were liquidated, not to shareholders who received 20% -25%. This was amazing and should be clarified for the future. Otherwise, the Swiss financial system remains strong.

In 2012, some asked for the Parthenon as a guarantee of approval for their decisions regarding Greece.

– If we look at Deutsche Bank over the past two years, it has performed very well in terms of profitability. It has a very high level of capital and liquidity. I don’t think it’s a systemic risk. In general, European banks are well capitalized. Of course, disputes about the quality of certain assets on their balance sheets continue. But overall, the European banking system is in good shape.

– At this stage, it is appropriate to raise relevant questions. First of all, I would separate the regulatory framework from oversight. The Trump administration has indeed made some regulatory changes to some of the standards that apply to average local banks. However, SVB will be considered sufficient even with the previous specifications. Where the system suffers is in the effectiveness of management, board management and oversight. In other words, we should focus more on the quality of supervision and risk management within the banks themselves. Let’s not forget that today banks contribute to the common good in the global economy, so the supervisory authorities must scrutinize risk managers and boards of directors very carefully. I don’t understand why the Fed oversight continues to monitor the SVB situation without taking any action. That’s where we should be looking. This is more about bad governance than bad regulation.

– In fact. In fact, I was at the center of these events as the banks’ chief negotiator for Greek debt in 2011-2012. And I have very vivid memories, some of which I included in a book I prepared in the fall called Euroshock: How the Biggest Debt Restructuring in History Helped Save Greece and Stabilize the Eurozone. I remember meetings with Angela Merkel, Nicolas Sarkozy and George Papandreou, as well as with Lucas Papademos. Some of them were painful moments. Greece had 28% unemployment and people were protesting in the streets. Its economy was shrinking along with its capital base. But I also remember the really strong leadership of Lukas Papademos, as well as the resilience of the Greek citizens, which was admirable. I salute the Greeks because others would really collapse in the face of this terrible pressure. The Greeks still managed, despite the fact that many actors in some European capitals believed that Greece would be better off outside the eurozone. I never believed in it. I always thought that Greece belonged to the Eurozone and that Grexit would be disastrous. I think that today Greece has regained its authority. And today he has a very strong leadership, which, in my opinion, is doing a lot to strengthen the country’s economy.

“He was absolutely palpable. We had senior government officials, including the German finance minister, openly saying that Europe should do away with Greece by kicking it out of the eurozone. Others asked as a condition that the Acropolis, Parthenon and islands be guaranteed to validate the decisions regarding Greece, which I found unacceptable. The pressure on Grexit was surprisingly strong because many leaders did not want a restructuring and reduction of Greek debt while Greece was in the eurozone. It was a difficult decision. My own point of view, which proved to be true, was in favor of restructuring, because if we reduce the debt burden, we will also reduce the transfer pressure to Italy, Spain, Portugal and Ireland.

Greek banks were fortified

– When we look at the Greek economy, we always need to be careful. But Greek banks have repositioned themselves quite well in terms of capitalization and assets. The Greek economy has grown impressively in recent years despite COVID-19, also reflecting the improvement in bank balance sheets. Of course, the banks have shifted the old bad debts to other funds. These cars are not a problem for banks, but they are a problem for the economy as a whole. Because these non-performing assets must be cleared up anyway so that the underlying companies can resume economic activity. In general, however, I had a good impression of Greek banks when I was in Athens a year ago. They have a strong administration that strengthens the banks’ position in terms of capital and liquidity.

* Mr. Charles Dallara will attend the 8th Delphi Economic Forum, which will be held April 26-29 in Delphi.