Mr. El-Erian, there is a lot of bad news from America's banks right now. How dangerous is this for the financial world?

Dennis Kremer

Editor in the "Value" section of the Frankfurter Allgemeine Sonntagszeitung.

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We are experiencing an earthquake that occurs in individual phases. We saw the first phase in March, when it was mainly Silicon Valley Bank that attracted attention. The banks that were affected at the time were poorly managed, but there were also special external factors: the pace of interest rate hikes, which these banks could not cope with. And gaps in supervision, which did not look closely enough at regional banks. Now, however, we are already in the second phase of the quake. This time, banks are affected, which are not badly managed, but which are structurally vulnerable.

They allude to California's First Republic Bank, which was recently taken over by JP Morgan after massive difficulties.

Exactly. The amazing thing is: For a long time, First Republic was a bank that many admired. Their customer service was considered the best and their clientele was attractive because they specialized in wealthy individuals. Nevertheless, First Republic fell into the maelstrom of this crisis. It took weeks for the solution with JP Morgan to emerge, as the share price had already fallen by more than 90 percent. Whether it's a shareholder, creditor or saver, when problems arise, everyone tries to get out of it as quickly as possible. There is a lack of a functioning resolution mechanism for banks of this type. It has all taken far too long. However, I am really worried about a possible third phase.

What would happen at this stage?

Then interest rate risks would become credit default risks. What do I mean by that? Rising interest rates are particularly noticeable in the market for office properties, which are often no longer so attractive after Corona and whose refinancing has now become significantly more expensive. In the worst case, real estate loans can no longer be serviced. This would lead to defaults, which in turn would hit the regional banks hard, because they are particularly involved in this market. What worries me is that we would then have a problem that would get bigger and bigger.

Do you think there could be a financial crisis like the one in 2008, which also started with problems in the housing market?

No, I don't expect that. We are not witnessing a repeat of the financial crisis. Because this time the really big banks are not affected, on the contrary: they even benefit from the situation, as the example of JP Morgan shows. The bank was able to absorb First Republic at a fraction of the price it would have had to pay just a few weeks ago. I'm concerned with something else: the risk of infection. On the one hand, in such times, all banks become more cautious and lend less. This increases the risk of an economic downturn in the United States that could have been avoided. And on the other hand, there is also the danger that more and more banks will get into trouble that are actually in a good position.

So can the problem spread to European banks?

I don't think so. There is a reason why we have not seen any contagion in Europe so far, if we leave aside the special case of Credit Suisse. The reason is that European banks are better regulated than American ones, and the European financial system is not as vulnerable as the American one.