Banks in crisis are not the cause of the world’s problems, but they are a symptom

Another month, another bank in turmoil, writes Ilgar Nagiyev.

Banking as an industry prospers - survives even - thanks to dependability; the sense of trust that they project so well. Swiss banks in particular have long mastered this; establishing themselves as time-tested institutions. This armour of trust, however, starts to look a little rusty when a Swiss bank collapses.

Credit Suisse was the second largest bank in Switzerland, with in excess of five-hundred-and-seventy billion dollars in assets and three times as much under management. It was seen as too big, too old, too established to fail, yet it collapsed in the same week as the Tier One-rated Silicon Valley Bank. Collapses like this are a problem, but they are not the problem. The problem stems from growth or rather a lack of it. We are voraciously addicted to growth and when we can’t get it, we experience negative side effects.

And growth is proving harder to find.

After the fall of the Berlin wall, free market economics quickly became the norm, in what some have called The Great Doubling. Suddenly, there were more global markets and more wealth to go around. Unfortunately, there are no longer extra countries to find and few un-tapped markets to boost the global GDP. Plus, everything is deeply interconnected, which becomes all too apparent when things go wrong.

Take China, the primary driver of that global economy over the last twenty years. According to the Wall Street Journal, China has now spent a trillion US dollars on its ambitious Belt and Road initiative, which has helped them carve a benefactor’s niche that stretches from Central Asia to Latin America. However, inflation, higher interest rates and supply shortages have impacted many of the economies that they do business with, leading China to tighten the flow of money they have been supplying. Whilst everyone loves the one who buys them dinner, their feelings become more complex when that person asks them to PayPal back their share. The result is what some western economists are calling debt trap diplomacy.

Many of those same economists have been predicting this for a while, but then there are the things that we cannot predict and which we find ourselves woefully unprepared for.

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Hot on the heels of a pandemic that, according to one IMF prediction has slashed 12.5 trillion from the world’s economy, comes the first truly global energy crisis. This has slammed into reverse the idea that we would return to some form of stability post-pandemic and get back to the business of making money. It has stoked inflation, challenged climate commitments and led governments to spend billions trying to soften the impact of rising energy costs. It’s a burden that disproportionately affects poorer populations with fifty-four countries already seeing a steep rise in the size of their debt and at risk of defaulting - a quarter of the world’s nations.

So, if we can’t grow ourselves out of trouble, what next?

The United Nations Department of Economic and Social Affairs has suggested four ways to do it; Diversify economies, stem inequalities, improve institutions and make finance sustainable. Few can argue that banking institutions need improving and that finance should be sustainable. Fewer still can dispute that there are inequalities that urgently need addressing - if not for kindness, then for the sake of their bank balance. Diversification, however, could be particularly promising. The Gulf Cooperation Council, for example, are trying to break their mutual dependence on oil by introducing Value Added Tax for the first time. Arguably, the energy crisis itself will speed up investment and drive research into renewable sources, all of which will then have the opportunity to be sold around the world, potentially igniting a new wave of growth.                                                                                                                        

Doing so will require a significant global response, but we are now averaging a financial crisis every decade and inevitably more banks will fail. A band-aid won’t stop the bleeding, even a two-billion-dollar band-aid like the UBS buyout of Credit Suisse. But trying something new might.

Ilgar Nagiyev is an Azerbaijani entrepreneur, chairman of the board at Azer Maya, a leading producer of nutritional yeast in Azerbaijan, and chairman of the Board of Baku City Residence, a real-estate company. He is an alumnus of both the London School of Economics and Political Sciences and TRIUM Global Executive MBA.

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