The failures of Silicon Valley Bank and Credit Suisse have made a global economic slowdown more likely and European governments should be ready to support businesses as credit conditions tighten, veteran Italian banker Corrado Passera has said.
“The banking crisis in the United States and the situation at Credit Suisse have increased the risk of recession,” said the 68-year-old, who left the top job at Italy’s largest bank Intesa Sanpaolo to serve in government at the height of the country’s debt crisis in 2011.
Passera, who is now chief executive of Illimity, a digital bank he founded five years ago, added he was most worried about the impact on small and medium-sized businesses. Governments should be on alert “to compensate for lack of credit availability, because problems in this area of the market will translate to the rest of the economy”.
More than 75 per cent of Italian businesses are SMEs. Illimity specialises in lending to the sector and in the management of non-performing loans. It reported €75mn in net profit and had €6.5bn in total assets in 2022, up from €3bn in 2019.
Financial shares have fallen around the world after last month’s bank failures. While European regulators have sought to reassure investors that the bloc’s banks are in a much better position compared with the financial crisis 15 years ago, businesses are likely to be less able to withstand another major shock or tightening of credit conditions only three years since the start of the pandemic.
Passera pointed out that macroeconomics and structural changes in banking had created challenges for smaller companies.
“High interest rates, bank branch closures, which have taken away a channel to access finance for SMEs, and the uncertainty around banks’ equity might stress this segment of the market,” he told the Financial Times.
While Italy is expected to avoid recession this year, analysts and experts have warned that the combination of rising interest rates, inflation and the latest banking turmoil could have unexpected consequences.
“The European Central Bank must not overreact and give inflation time to cool . . . it is important for central banks to demonstrate that they are aggressively fighting inflation, but stagflation [a combination of high inflation and economic stagnation] must be avoided at all costs,” Passera said.
“Interest rates are now sufficient to cool inflation.”
Last month, Bank of Italy governor Ignazio Visco was the first European central banker to warn against prolonged interest rate rises. The ECB stuck with a planned 50 basis points rate rise in March but policymakers have been hinting that they will stop increasing rates.
“The job of central banks today is quite difficult as monetary policy actions can have opposing outcomes in terms of both price stability and financial stability,” said Passera.
“While inflation needs to be reduced drastically, collateral damage cannot be ignored.”
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