Faculty of law blogs / UNIVERSITY OF OXFORD

Preventing a New Global Financial Crisis amidst the current ‘inflation crisis’ and the Spring 2023 bank failure episodes


Christos V. Gortsos
Professor of Public Economic Law, National and Kapodistrian University of Athens and President of the Academic Board, European Banking Institute (EBI)


Time to read

3 Minutes

The recent financial turmoil began in the US in March 2023 with the failure and then the resolution by the US Federal Deposit Insurance Corporation (FDIC) of the Silicon Valley Bank (SVB) and the Signature Bank. It then spread over to Europe and led to the forced takeover of Credit Suisse by UBS (which was not a resolution case), while on 1 May, the FDIC took again resolution action in relation to the First Republic Bank. The turmoil appears to have been brought under control. Moreover, the action taken in particular by the FDIC is a clear demonstration that the appropriate and timely application of resolution tools can prove beneficial in terms of preserving financial stability. However, as the disruption that has arisen in the business models of many banks with the continued increase in interest rates has not disappeared, it is interesting to have a closer look to the way ahead. This is the key objective of my recent (May 2023) article entitled ‘Preventing a New Global Financial Crisis amidst the current “inflation crisis” and the spring 2023 bank failure episodes’, which also briefly discusses the above bank failure episodes.

Threats to financial stability during the current inflation crisis

It is interesting that, unlike at the time of the 2007-2009 global financial crisis and the period until almost last year, as the episodes of SVB, First Republic and Credit Suisse were ongoing, and despite the existing potential threats to financial stability, central banks in most developed economies (including those in the US and Switzerland) decided to continue raising their official interest rates. Their primary objective was and remains to bring under control inflationary pressures, which have been higher than expected in a relatively short period of time and are tending to take on a permanent element in many economies. In this sense, and amidst a highly and multidimensionally uncertain international environment, we see a reinforced argument that monetary policy is—in principle—not the most appropriate instrument to safeguard financial stability. However, the trade-off between high inflation and financial instability remains evident. Therefore, when setting their interest rates, central banks incorporate in the definition and implementation of their monetary policy an economic analysis of the impact that (further) increases (and/or, where appropriate, decreases) in interest rates may have on banks’ credit policy, as well as on capital markets.

At the same time, a ‘danger signal’ has been given that a generalized and untargeted fiscal expansion may negatively affect the effectiveness of monetary policy: at a time when higher (official) central bank interest rates are aimed at dampening demand, fiscal expansion may lead to exactly the opposite direction. An appropriate monetary and fiscal policy mix is thus crucial.

According to, inter alia, the International Monetary Fund and the European Central Bank (ECB), in the current context of the inflation crisis there are many threats to financial stability. Highly indebted governments are more vulnerable in terms of refinancing their debt; the same applies to private and corporate borrowers (with variable interest rate contracts), as well as to banks and non-bank financial entities. Moreover, higher interest rates—especially when combined with risk aversion on the part of investors—also have a negative impact on many asset classes in banks’ portfolios, such as stocks and bonds (interest rate risk arising from positions in bonds and poor asset-liability management were the key reasons for SVB’s failure). Furthermore, the increase in volatility in capital markets (as in some real estate sectors), combined with (partially) limited liquidity, as well as pre-existing weaknesses in several jurisdictions, could translate into an increase in a potentially accelerated and disorderly repricing of credit risk, with borrowing costs for many companies already reaching their highest level in decades.

The way ahead

The recent bank failures in the US and Switzerland are more attributable to idiosyncratic business problems (business failures), as well as correspondingly specific regulatory and/or supervisory failures. However, they emphatically demonstrated that banks continue (over time and structurally) to be exposed to the risk of bank runs (especially from savers whose deposits are not covered by a deposit guarantee scheme). The prevailing assessment is that, overall, the banking system remains resilient, especially following the introduction of stricter and more targeted prudential regulation rules in the early 2010s and the strengthening of prudential banking supervision in many jurisdictions (including in the euro area, with the establishment of the Single Supervisory Mechanism (SSM) and the conferral on the ECB of specific supervisory tasks).

In the author’s view and based on a thorough analysis of the causes of bank failures, legislators and the authorities responsible for safeguarding financial stability (including central banks) should take further appropriate measures to maintain or (when necessary) restore depositors’ confidence in the banking system; some have already done so. It is also important to limit regulatory and supervisory failures at national (or, in the case of the euro area, at EU) levels. Furthermore, international financial institutions and fora are expected to identify possible necessary interventions in the global regulatory framework and propose appropriate policy measure, especially regarding the efficiency of existing resolution regimes for large banks. It has been known for decades now that the impact of the (non-legally binding but legally important) rules adopted at international level is catalytic for the shaping of the banking and in general financial regulatory framework on a global basis.

Christos V. Gortsos is Professor of Public Economic Law at the Law School of the National and Kapodistrian University of Athens.


With the support of