Crisis as a Self-fulfilling Prophecy Hangs Over European Banks

On Monday, Marcel Fratzscher, the president of the German Institute for Economic Research (DIW), warned of the possibility that fears about the impending banking crisis could become a self-fulfilling prophecy.

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"At the moment, no one can exclude that the turmoil in the banking sector will lead to significant effects on growth and welfare in Germany and Europe," he said.

Currently, the existing systemic risks in the financial system are less than at the time of the bankruptcy of Lehman Brothers in 2008 and many financial institutions have more capital of their own and protection measures. Despite this, a panic reaction could occur in the financial markets, since nobody knows which banks could suffer financial difficulties.

"Such a panic could lead to a self-fulfilling prophecy. This means that liquidity fears in the banking sector also jeopardize the future of otherwise solvent banks," Fratzscher warned, adding that the Credit Suisse case demonstrates that systemically relevant banks may also be affected by the turmoil.

The tweet reads, "This banking crisis is a reorganization of the power circles: the big ones will get bigger. And the citizens will lose. They will impose the Central Banks' new digital currencies (CBDC) in us."

"Losses will become more acute with each rise in interest rates by the European Central Bank," he predicted, clarifying that this policy is "a risky decision in the best of cases and a weighty error in the negative."

An escalation of the situation and a banking crisis are currently "the greatest danger" for price stability in Europe as they could seriously weaken the economy and cause unemployment.

Fratzscher demanded that the German government seek a balance between "transparent" management of the situation and maintaining "credibility", when it comes to ensuring that it is willing to do everything necessary to calm it down.

So far, Chancellor Olaf Scholz has denied that there is a risk of contagion and has emphasized that the German banking system is well prepared to deal with the situation.