It's far better to sell the bank than to bail out — Rogoff picks UK approach to SVB crisis over USA

The past week has been marked by turmoil in global stock markets, with banking stocks bearing the brunt of the impact. The crisis began with the collapse of Silicon Valley Bank, followed by Signature Bank and Silvergate. As investors grappled with these developments, Credit Suisse, a major European lender, suffered a significant drop in share prices, prompting the Swiss National Bank to intervene with a massive $54 billion bailout.

First Republic Bank in the U.S. needed a $30 billion bailout from a consortium of American Banks including heavyweights like Citi, JPMorgan, Wells Fargo and 8 others.

Economist Kenneth Rogoff spoke to CNBC-TV18 about the ongoing global banking crisis. He highlighted that it's far better to sell a bank than to bail it out, pointing out the UK as an example of a country that took this approach.

Selling a bank not only helps in avoiding the financial burden of bailing it out, but it also ensures that the market remains competitive and efficient.

He said, “It's far better to sell the bank than to do the bailout, it is far better. Silicon Valley is a very valuable enterprise and I was just puzzled, that they didn't find someone to sell it to earlier on. That's the first thing you do in a crisis like this, is you try to wipe out the stockholders, the shareholders, but then, you know, keep it going as a going concern.”

The ongoing financial crisis is not new and tends to go in waves. Rogoff expects the crisis to continue for some time, but it may not continue in the United States. He suggested that Europe or other areas may be the next ones to experience a financial crisis.

Rogoff also pointed out that the shadow-banking system with low regulation could be holding a lot of problems.

He said, “There are a lot of institutions that aren't so regulated, we call the shadow banking system. And I think, you know, you have some of this also in India, and they are probably holding a lot of problems as well, but that has yet to come.”

When it comes to the Federal Reserve's decisions, Rogoff noted that they probably won't go for a 50 bps hike. However, he expects the Fed to make a 25 bps hike, but only if there is stress in the banking sector.

Rogoff said, “They are not going to go for a 50 basis point hike, the optics of bailing out the rich depositors at Silicon Valley Bank and in fact, the broader program they did for other big uninsured depositors, and that at the same time, raising the interest rate 50 basis points, that alone which hits Main Street, that alone is probably a reason they won't do it. It's probably more likely than not, they will do half of that.”

The Fed and Treasury have made it clear that they will do everything in their power to prevent panic liquidation, which can have severe consequences for the market.

India has benefitted from people who want an alternative to investing in China. However, the banking sector in India has a very long history of dealing with trouble. The problem in India is not so much a meltdown in the banking sector, but in keeping the economy moving. The Indian authorities will have to focus on ensuring that the economy keeps growing, even in the midst of financial turbulence.

Finally, Rogoff stated that there is no question that authorities this time are tilting towards "when in doubt, bail it out."

He said, “I don't think there is any question that the authorities this time are tilting more towards, when in doubt, bail it out. That's what they did but that could cause long term problems, we just don't know.”

Rogoff suggested that the International Monetary Fund's (IMF) positive outlook on the global economy just a few weeks ago might not be reflective of the current situation.

“Just a couple of weeks ago, the IMF, with the end of January, the International Monetary Fund was saying things are much better than we thought the global economy is looking really good. I think when we see their report in April, they're going to be much more cautious. The odds of a global recession are far from certain, but they have gone way up.”