Why are banks failing and what do you need to do now?
The financial world hasn’t seen a week like this since 2008, with the banking sector in turmoil as the global economy teeters on the brink of another crisis.
For those who didn’t experience a previous financial crisis, the fast-moving situation can be confusing – and more than a little unnerving. Want to keep track of what’s happening? To help readers get up to speed as the weekend approaches, we’ve put together a guide.
So far three US banks – Silvergate Capital Corp, Silicon Valley Bank and Signature Bank – have collapsed. First Republic Bank, another large US lender, is wobbling, with its share price plunging more than 70% this week. It fell 33% on Friday even after receiving a $30 billion lifeline from its larger peers on Thursday in an effort to stave off the turmoil. Analysts believe that the impact of uncertainty will continue to weigh on bank stocks.
Meanwhile, Credit Suisse AG, one of only 30 global financial institutions designated as systemically important by the International Financial Stability Board, is facing a host of problems.
Leaders of central banks around the world, from the Federal Reserve’s Jerome Powell to the European Central Bank’s Christine Lagarde, have assured the public that the recent turmoil is not a repeat of 2008.
But confidence in the global banking system has been shaken and things are still changing fast, with Credit Suisse reportedly planning to hold meetings over the weekend to assess different scenarios for its future.
Silvergate was the first US bank to collapse, due to its exposure to the vulnerable crypto industry. This meant that investors were on edge when the Silicon Valley bank said it was looking to raise more than $2 billion to shore up its finances, and it sold a large portion of its securities portfolio at a loss.
In more than 40 years, SVB had become the bank of choice for the world of tech startups and venture capital, riding the boom of the industry to become the 16th largest bank in the US. But news of its troubles set off a classic run at the bank as depositors rushed to withdraw their money. Eventually, the Federal Deposit Insurance Corporation took control last Friday, making SVB the second largest bank failure in US history.
Signature Bank also experienced massive deposit outflows as customers became nervous about exposure to crypto, which prompted state regulators to shut down the New York regional bank over the weekend. Billionaire investor Bill Ackman tweeted Friday that he expects Bank of America to buy Signature next week.
As the crisis escalated, US officials announced extraordinary measures to backstop the financial system in an effort to prevent the panic from spreading. Still, San Francisco-based First Republic, which caters to the personal banking needs of tech’s elite, was hit hard by the contagion. Fears about the stability of regional banks caused depositors to move their money to financial institutions deemed too big to fail, with Bank of America Corp alone adding more than $15 billion in new deposits in a matter of days. took more
It’s not just America – the fall of SVB has reverberated around the world. Investors worried about the stability of banks triggered a massive selloff in global financial stocks that wiped out $465 billion in just two days. Already embroiled in scandal, a loss of investor confidence plunged Zurich-based Credit Suisse into crisis after its largest shareholder said he would not increase his stake. Even after the Swiss Central Bank provided a lifeline, there are still a lot of questions about the future of the banker to the world’s rich.
Why is this happening?
The Federal Reserve has been attempting to cool decades of high inflation by raising interest rates. In theory, raising rates, which make it more expensive for people and companies to borrow money, could put the brakes on an overheated economy and slow the pace of rising prices.
Higher rates could also push the economy into recession, and fears of a recession could force a reckoning in fast-growing sectors whose supporters want to see a stronger outlook for future growth. This includes the tech industry, which experienced a golden age fueled by low borrowing costs and rapid growth during the pandemic.
The slowdown in tech hit SVB hard as its customers started pulling out. SVB also suffered from high interest rates on the asset side of its balance sheet: it invested billions of dollars in long-term maturity bonds, which lose value when rates rise. When SVB was forced to sell a large portion of those bonds at a loss, it shook the confidence of its customers. In response, depositors, including prominent venture capitalist Peter Thiel, tried to withdraw $42 billion in a single day.
As it turns out, the Federal Reserve Bank of San Francisco flagged interest rate risk in the SVB a year ago as a serious problem. The Fed has promised to investigate how it supervised the bank.
What does it mean for you?
The recent turmoil in the banking system has major implications that could change the calculus of consumers’ financial decisions – and increase recession risks. According to financial experts, US consumers may face consequences such as reduced access to credit, changes in interest rates on deposits or losses on investments.
The collapse has also raised concerns among savers about the safety of their money. In case your bank fails, the FDIC protects up to $250,000 per depositor in eligible accounts at insured banks. For those whose deposits exceed that amount, we have some advice here.
At least in the short term, some analysts expect the Federal Reserve to hold off on its rate hikes. This would be good news for potential home buyers who have been crushed by rising mortgage rates. However, it could also mean lower returns on high-yield savings accounts and other cash-like securities, which investors have embraced this year.
(Except for the headline, this story has not been edited by NDTV staff and is published from a syndicated feed.)