We all know that the USA has the largest and the most efficient financial market in the world. They have established the most powerful regulator for safeguarding their financial sector. There is proven record of exercising US regulator’s highest authority in enforcing the laws and regulation. Many largest banks in the world have been mercilessly punished by US regulator for compliance failure and violation of laws. Switzerland is another country in the world where there is proven record of maintaining sound financial system and their regulator is also powerful in establishing standard practice in the financial market. Despite establishing efficient financial system and powerful regulator, financial market experienced debacle in 2008 that first erupted in the USA caused by subprime mortgage bust, which swept across the world particularly the developed countries and eventually resulted in economic recession. During financial turmoil in 2008, some small and medium size banks and financial institutions went bankrupt and many other banks, including few largest banks, were on the verge of collapse but were salvaged with government intervention with pouring taxpayers’ money in the name of so-called bailout package.

Further strengthening regulatory authority: In consequence of financial debacle in 2008, the US authorities realized that despite the presence of powerful regulator, severe weakness existed in the financial market what they decided to remove and thus make the financial system in the USA foolproof. Keeping this in view, some drastic actions were taken and, among those, important measures include (I) enactment of Dodd Frank Act, (II) prohibition of proprietary trade that allows banks and financial institutions to trade with their own money, (III) introduction of stress test for all banks and financial institutions to measure bank’s resilience during crisis period, and (IV) maintaining adequate liquidity. In addition, stringent external as well as internal grading was also made mandatory. With introduction of all these stringent measures, it was anticipated that financial market in the USA and other parts of the developed world would be much better off situation where incidence of bank’s collapse will not recur. However, it has again been proved wrong because banks have again miserably collapsed in the USA and Switzerland. Collapse of two midsize banks in the USA and Credit Suisse, second largest bank of Europe, proves that no regulator or central bank in the world, regardless how powerful it is, can guarantee the protection of the bank.

Difference between 2008 and 2023 crisis: In 2008, the main reason of banks’ collapse was highbred product and subprime mortgage, which is not even eliminated from the financial market, rather continuing in different form with higher degree of risk. During 2008, prices of essentials were not so much skyrocketed what is the crucial problem in the current situation and people’s livelihood is in unflinching situation due to exorbitant price hike. In 2008, interest rate was high but that was raised over the preceding five/six years period, when people gradually got used to with high interest rate. So they did not bear the pain. Now, the interest rate has been unusually raised from zero to 4.50% within nine months time, which has caused severe financial suffering to the common people. During financial crisis in 2008, no large bank collapsed and even we did not heard of collapsing any bank in Europe, although all banks irrespective of size fell into trouble. In fact, entire banking sector in the developed world were in severe crisis. The current situation is more alarming because no sooner had two midsize banks collapsed in the USA than one of the largest banks in the world and second largest bank in Europe collapsed. In 2008, subprime mortgage scandal led to bank’s collapse that eventually resulted in economic recession. Recurrence of such situation is also anticipated in 2023 whose indication is apparent with the collapse of banks in the USA and Switzerland. Because, history in the USA reveals that whenever Federal Reserve has excessively raised benchmark rate, the economy has experienced great shock finally leading to recession. And the current situation will not be exception.

Financial versus political crisis: During the financial crisis in 2008, there was no political crisis, particularly the likes of the Russia-Ukraine war. Consequently, degree of crisis and true reasons thereof were properly made public and govt of the USA and other European countries fully focused on the financial sector and came forward with all of their resources with a view to salvaging the falling financial institutions. As a result, there was great shock in financial sector but recovery was quick and solid. The current situation is completely different because severe political crisis is sweeping across the world. Not only the Russia-Ukraine war has been continuing over year but also China-Taiwan issue has taken serious turn in the global politics. The way western world is pushing Russia and China into one ally, is not a good sing at all for the world. Besides, western world led by the USA have been confronting Russia with financial weapons which have boomeranged for the western financial market. Rising interest rate too high is not aimed to control inflation only, rather forcibly making US dollar hard currency so that countries extensively dependent on dollar can fall into deep crisis. Some countries appear to have fallen into crisis but that weapon has eventually backfired to the western world. Because of this prevailing political confrontation, western world is focused on politics than economy. For that reason, US President has openly declared in the news conference that his government will not protect the investors of collapsed Silicon Valley Bank. Even, US President abruptly left the conference without replying to a question asked by a newsman present in the conference. I cannot imagine what would be the situation if Head of our government would make such comment in the wake of any bank’s crisis. Instead of ignoring the responsibility on bank collapse, if the US President would have assured the people saying that there is nothing to be worried because his government and regulator are going to take appropriate measure, situation would have been different.

Risky banking business: Collapsing banks in the country with sound financial system and most powerful regulator suggest that no regulator in the world regardless of its authority alone will be able to protect bank unless banking business and its product can be made risk free. If regulator is powerful but banks are engaged in high-risk environment and dealing in excessively risky products, the collapse of bank is inevitable as happened in the USA and Switzerland. On the other hand, if regulator is relatively less powerful but banks are engaged in low-risk environment and dealing in less risky product, collapse of bank will unlikely occur as banks in the emerging market, including Bangladesh and India. Some may misinterpret my views. For them one issue should be made clear that main product in our banking industry includes deposit mobilization and loan disbursement and even lion share of bank deposit comes from small savers. These products in the banking industry are historically proven as low risk product. Deposit mobilization and loan disbursement are lower ranking products in the banking industry of developed world. Their first ranking products are mostly highbred and supper highbred financial instruments what bears extremely high risk. Readers may have interest in knowing about highbred product in banking, but this is a kind of complex topic that cannot be explained here however, intend to discuss in somewhere else. I have been working in the bank of the developed world for over a decade and half yet cannot measure the depth of its product and services. Sometimes I get confused whether I am working in a conventional bank or investment bank or any hedge fund. Product complexity and sensitivity in the developed world’s banking, is so high that bears highest degree of risk which with little shock can cause the bank collapse and the regulator with highest authority cannot protect them. However, it does not mean that there is no need for powerful regulator. The strongest regulator has no substitute for sound financial system, and it is undeniable fact that as the regulator is powerful, so the financial market is protected.

In 2008, financial market was flooded with highbred product, subprime mortgage what ultimately caused financial turmoil leading to recession, and the regulator being the most powerful authorities in the world could not do anything to prevent banks from collapsing. In the same way, current financial market has been extensively dominant with highbred and super highbred product like start-up finance, investment in inferior bonds. So, eventual consequence will be the collapse of banks what is happening now, and regulators in spite of being more powerful than past could not protect the banks from collapse because it is obvious that even the strongest regulator alone cannot protect bank.

The writer is a Banker based in Toronto, Canada. Email: [email protected]