Friday, March 10: Silicon Valley Bank (SVB) was taken over by
the Federal Deposit Insurance Corporation (FDIC), an agency of the US government.
Since Washington Mutual's demise in 2008, it was the largest banking collapse in American
history.
The bank had suffered a multibillion-dollar loss when it sold US government bonds to raise
cash to pay depositors, which set the wheels in motion 48 hours earlier.
Sunday, March 12: The FDIC shut down Signature Bank after a
run on its deposits by customers who were spooked by the implosion of SVB.
Both banks had an unusually high ratio of uninsured deposits to fund their businesses.
Wednesday, March 15: After watching shares in Credit Suisse (CS)
collapse by as much as 30%, Swiss authorities announced a backstop for the country's second-biggest
bank.
Although the immediate market panic was reduced, the global player is still not out of the
woods.
Customers and investors are concerned since the company doesn't appear to have a solid
plan in place to stop the long-term collapse of its business.
Thursday, March 16: First Republic Bank was on the verge of failure
as a result of clients taking their savings out.
The CEO of America's largest bank, Jamie Dimon, and US Treasury Secretary Janet Yellen developed
preparations for a private sector bailout during a meeting in Washington.
In fact…
Markets are on the edge: Since the close of trade last week, benchmark indices of shares
in the US and European banks have fallen 20% and 13%, respectively.
So, what is happening?
Is the market telling us something bad is coming?
Well, The current situation partly has its roots
in the significant interest rate hikes seen in 2022.
The collapse of California’s Silicon Valley Bank has triggered a wave of volatility in
global bank equity prices…
Due to cash withdrawals from its clients, who are primarily in the technology industry,
Silicon Valley Bank was obliged to sell its holdings in long-dated bonds.
The result was a huge loss for the bank.
It became a vicious loop where anxious depositors tried to withdraw their money as worries about
the bank's health grew, leading the bank to realize further losses and deteriorating its
financial position.
And this was the first domino to fall…
Followed by Switzerland's Credit Suisse requesting a government lifeline and America's top banks
agreeing to offer a $30 billion rescue deal - all in the space of 10 days.
Investors around the world were already uneasy about the state of the market, so the rapid
failure of both banks has further added to their unease.
More bank collapses are most likely to occur in the future.
So, there will be more suffering, according to analysts, politicians, and the markets.
And the question of whether we are on the verge of another financial crisis like the
one that occurred in 2008 has been raised in response to this turbulence in the banking
sector.
Just a few weeks ago analysts were convinced the global economy was powering ahead.
Now they worry about a deep recession...
And we are witnessing stock markets around the world experiencing dips, with financial
equities experiencing particularly steep declines.
So, is the banking sector heading toward the 2008 crisis?
Well...
Let’s not sugarcoat things…
Because finance is prone to cycles of boom and bust…
And we have seen it…
Inflation was already high, and now we have a banking problem on top of that…
The turmoil in banking stocks has triggered drops in yields for US Treasuries and Eurozone
bonds, and gold prices renewed their recent rally as investors sought safe havens.
We also know that Swiss banking has the best reputation for financial stability, so the
slide into uncertainty for Credit Suisse, and the shotgun marriage to UBS, have left
the Swiss rather dazed.
According to some analysts, the American economy has a 35% chance of entering a recession within
a year, up from 25% before the banking sector meltdown started.
The world's second-biggest economy, China, is also sputtering despite a burst of activity
following the rapid ending of draconian Covid lockdown measures late last year.
Corporate defaults are also rising amid the tightening monetary environment, with S&P
Global saying Europe had the second-highest default count last year since 2009.
Overall, banks around the world, particularly those thought to be weaker, have endured criticism
recently from investors.
Several financial institutions, including a Swedish pension fund, an Australian technology
company, and a Japanese investment firm, reported crises.
Hence…
The economic activity will be impacted, which will increase defaults and tighten lending
standards.
The stability of the financial system might be in jeopardy as a result.
Central banks and financial authorities would intervene if it got to this point.
The CEO of Australia and New Zealand Banking Group claims that the recent upheaval in the
global banking system has the potential to start a financial catastrophe.
Yet it is too soon to say if it would cause a financial crisis similar to the one that
occurred in 2008.
Because, the systemic issue that existed in 2008 does
not exist today…
While there are possible dangers in sectors including US commercial real estate and international
housing markets, the global financial system is nevertheless well-capitalized.
The banks are now required to retain more capital, and risk rules are strengthened.
In addition, banks have taken precautions with their short-term cash holdings.
With new tools at their disposal, central banks may now offer liquidity, and their swift
action demonstrates a willingness to do all it takes to prevent a worldwide disaster.
So, most experts believe that the impact of these current troubles will be contained.
So, an extreme Global Financial Crisis-style meltdown looks unlikely…
But still…
The risk is always there…
The world of banking is extremely complicated.
And it can be hard to identify where new fragilities might lie until the system comes under pressure.
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