FINS3650 · International Banking
International Banking Crises
Week 10 synthesises the course through crisis case studies — the Global Financial Crisis, the 1997 Asian Financial Crisis and the 2023 Silicon Valley Bank failure, plus European banking after the 2023 crisis — drawing out the common mechanisms (funding fragility, contagion, leverage, supervisory gaps) and the policy responses and lessons. It is examined as a multi-channel crisis diagnosis and a comparison across crises, and it is the natural capstone for the final exam's synthesis questions.
What this chapter covers
- 01Anatomy of a banking crisis: the bank run (faster now via uninsured, un-sticky internet deposits and social media), contagion channels, systemic risk amplifiers
- 02The policy toolkit: lender of last resort, deposit insurance, capital/liquidity injection, guarantees, resolution/bail-in
- 03The Global Financial Crisis (2007–09): subprime, originate-to-distribute securitisation, the shadow-banking run, Lehman, the regulatory response (Basel III)
- 04The 1997 Asian Financial Crisis: capital-inflow surge → peg break → FX losses and NPLs → regional contagion; currency mismatch
- 05Silicon Valley Bank (2023): funding-side (depositor) concentration, IRRBB and held-to-maturity unrealised losses crystallising in a fire-sale, the 2018 threshold exemption
- 06Credit Suisse (2023): governance failures, loss of funding confidence, forced UBS merger, AT1/CoCo write-down ahead of equity
- 07CoCo/AT1 conversion triggers and why a low book-equity trigger fires too late
- 08Cross-cutting lessons: fragility is inherent to maturity/liquidity transformation; the deposit-franchise interest-rate hedge can break; business-model viability as a leading warning signal
Diagnose the 2023 SVB failure across its channels
- +1Funding-side concentration: the deposit base was sectorally concentrated and interconnected (a tech/VC network sharing information and funders), and largely uninsured — so a loss of confidence hit many depositors at once, unlike the usual focus on asset concentration.
- +1Interest-rate risk in the banking book (IRRBB): the inflows were invested in long-duration government bonds that lost market value as rates rose sharply; because they were held-to-maturity, the unrealised losses sat off the visible balance sheet until a sale forced recognition.
- +1The run and fire-sale: rapid, social-media-amplified withdrawals of un-sticky, uninsured internet deposits forced the bank to sell the depreciated bonds, crystallising the losses and turning an unrealised mark into insolvency — modern runs are far faster than historical ones.
- +1The regulatory gap: after the 2018 rise in the US Basel III threshold, the bank sat below the cut-off and was exempt from the full liquidity ratios (LCR) and the most rigorous stress tests; supervisors had flagged governance gaps (a period with no chief risk officer) but follow-up was insufficient.
Key terms
- Bank run
- A self-feeding flight of depositors/creditors when a bank is believed unable to honour liquidity-at-par; modern runs are faster because internet deposits are less sticky, payments are instant and social media amplifies fear, and are ultimately stoppable only by an entity that can create legal tender.
- Contagion
- The spread of distress from one institution or market to others through direct interbank exposures, funding interdependence, fire-sale/asset-price spillovers, common exposures and confidence effects; a defining feature of systemic banking crises.
- Interest-rate risk in the banking book (IRRBB)
- The risk to a bank's economic value and earnings from interest-rate moves on held-to-maturity banking-book assets/liabilities; central to SVB, where long-bond losses stayed off the visible balance sheet until a forced sale.
- Funding-side concentration
- Reliance on a narrow, interconnected or uninsured depositor base, so a confidence shock hits many funders at once; the SVB lesson that funding concentration can be as dangerous as asset concentration.
- CoCo / AT1 bond
- A contingent-convertible instrument that converts to equity or writes down on a trigger to absorb losses; a low book-equity trigger (around 7% CET1/RWA) often fires only once the bank is already near-insolvent, absorbing losses gone-concern rather than going-concern (Credit Suisse's AT1 was written down ahead of equity).
- Lender of last resort
- The central bank's role in providing emergency liquidity to solvent-but-illiquid banks in a crisis, part of a policy toolkit that also includes deposit insurance, capital/liquidity injections, guarantees and resolution/bail-in.
International Banking Crises FAQ
Why did SVB fail so quickly in 2023?
Three channels combined. Its deposits were concentrated in a narrow, interconnected and largely uninsured client base; the inflows were invested in long-dated bonds carrying interest-rate risk in the banking book, whose unrealised losses were hidden by held-to-maturity accounting until a sale forced recognition; and a fast, social-media-amplified run on un-sticky internet deposits forced a fire-sale that crystallised the losses. A 2018 threshold rise had also exempted it from the full liquidity ratios and rigorous stress tests.
What are the common mechanisms across banking crises?
Funding fragility (runs and maturity/liquidity mismatch), contagion (interbank exposures, fire-sales, confidence effects), leverage, and supervisory gaps. Whether it is the GFC (subprime securitisation and a shadow-banking run), the 1997 Asian crisis (capital-inflow reversal, peg breaks, currency mismatch) or SVB 2023 (funding concentration and IRRBB), the same four channels recur, which is why crises are best diagnosed channel by channel.
Why are AT1/CoCo triggers criticised?
Because the conversion trigger is typically set at a low book-equity level (around 7% CET1/RWA, not far above the regulatory minimum), so conversion fires only when the bank is already near-insolvent — the instrument absorbs losses gone-concern rather than going-concern. The Credit Suisse case sharpened the criticism when AT1 holders were written down ahead of equity, upending the usual creditor hierarchy.
Can AI help me with the banking-crises topic?
Yes, as a study aid. Sia can help you diagnose a crisis across its channels (funding, asset/interest-rate risk, the run, the supervisory gap), compare the GFC, the Asian crisis and SVB, and explain the CoCo-trigger critique and the policy toolkit. It teaches the method and checks your reasoning; it does not do your graded UNSW assessment, and the academic-integrity policy applies.
Exam move
Treat this capstone as the place to consolidate the whole course, and prepare a reusable four-channel template for diagnosing any crisis: funding structure (concentration, un-sticky/uninsured deposits, the speed of the run), asset and interest-rate risk (leverage, IRRBB, held-to-maturity losses), the transmission/contagion mechanism, and the supervisory gap. Apply it to the three set cases — the GFC (subprime, originate-to-distribute securitisation, the shadow-banking run, Lehman), the 1997 Asian crisis (capital-inflow reversal, peg breaks, currency mismatch), and SVB/Credit Suisse 2023 — and build a comparison matrix by trigger, transmission and regulatory response. Learn the cross-cutting lessons (fragility is inherent to maturity/liquidity transformation; the deposit-franchise hedge can break; business-model viability is a leading warning) and the CoCo-trigger critique. Because this feeds the exam's synthesis questions, rehearse linking each crisis back to the Basel and regulatory tools. Ask Sia to have you diagnose a fresh crisis with the template; confirm assessment details on the FINS3650 course outline.
Working through International Banking Crises in FINS3650? Sia is AskSia’s AI Business and Economics tutor — ask any FINS3650 International Banking Crises question and get a clear, step-by-step explanation grounded in how FINS3650 is taught and assessed. Read this chapter free, then take your hardest questions to Sia.
