Banking crisis? How worried should I be?

Source: BBC

When the US president himself goes out of his way to tell people that their money is safe, then you know the government is taking a financial crash seriously.

Joe Biden’s assurances came after the collapse of two US banks.

But this isn’t just about the US. Shares in many banks have tumbled in value around the world.

So how bad is this and what does it mean for you?

What is happening with banks and are they collapsing?

Two banks in the US have collapsed since 10 March – Silicon Valley Bank (SVB) and Signature Bank – the biggest bank failures since 2008.

Both catered to businesses and had ties to the technology industry, which has been struggling due to sharp falls in crypto currencies and souring sentiment among investors.

When the country’s 16th largest bank SVB said it needed to raise money, customers panicked and rushed to withdraw their deposits. In less than 48 hours, nearly a quarter of the bank’s funds had gone.

After the panic spread to Signature, regulators said they would guarantee all deposits at both banks, not just the $250,000 required by law.

The failures came just days after troubles at a third bank, crypto-specialist Silvergate, forced it to wind down.

“We felt that there was serious risk of contagion that could have brought down, and triggered runs on, many banks,” US Treasury Secretary Janet Yellen said.

Are other banks going to crash?

A bank run is when many customers rush to withdraw their money at the same time, and there is fear other banks may be vulnerable.

In the US, shares in medium-sized banks have plunged, as investors worry their small business and wealthy customers may transfer large sums of money to other banks.

Bigger banks are seen as more stable, since they have a wider variety of customers – including everyday people who are less sensitive to market news and whose savings are usually below the $250,000 limit.

Analysts at S&P Global Ratings say they have not seen evidence in the US that “unmanageable” withdrawals have spread widely, despite problems at a few banks, such as San Francisco-based First Republic.

But in a sign of the strains, the US central bank reported a surge in emergency lending to banks looking to boost their funds. In Europe, giant Credit Suisse, which has been troubled for years, accepted an emergency £45bn lifeline from the Swiss central bank.

Why are banks collapsing now?

All this is happening against the backdrop of a much bigger, global change – the sharp rise in borrowing costs over the past year.

Central banks around the world, including the US Federal Reserve and the Bank of England, have been raising interest rates to try to slow the economy and ease the pressure pushing up prices.

The hikes contributed to SVB’s issues, making it harder for their start-up customers to borrow money, which left them withdrawing their money at a faster pace.

But the rise in rates – a huge change after years of low-cost borrowing – has created a much wider problem too, hurting the value of long-term bond investments that banks bought when interest rates were lower.

In the US alone, banks are sitting on roughly $620bn in unrealised losses.

That is not a problem if they can hold onto the bonds. But it makes it much more difficult if they need to raise money in a hurry.

In Japan – which has been a big buyer of US bonds – regulators raised the issue months ago. In Europe, analysts have said it’s not a big issue.

Morningstar analysts on Friday called Credit Suisse’s problems “idiosyncratic” and said European banks widely were “solid”.

The European Central Bank raised rates 0.5 percentage points as planned on Thursday; but analysts expect the recent turmoil to lead the US and UK central banks to move more cautiously when they meet next week.

Is my money safe?

Ordinary people have little reason to fear for their funds. The US government has long safeguarded deposits up to $250,000; in the UK, the limit is £85,000.

US President Joe Biden has pledged to do “whatever it takes” to ensure the safety of the banking system and assured people their money is secure, while officials in Europe, Japan, Australia and elsewhere have likewise sought to ease concern.

Regulators say rules passed in the wake of the 2008 financial crisis mean most banks are in a stronger position to withstand a shock.

As a smaller American bank, SVB was exempt from some of those requirements, because the US loosened requirements in 2018 – a change sought by SVB itself.

“This failure was the direct result of leaders in Washington weakening financial rules,” said US Senator Elizabeth Warren, a Democrat known for her work on the banking industry.

Is this a banking crisis?

For many, the meltdowns in the banking sector have evoked the spectre of the 2008 financial crisis, when some of the biggest banks in America collapsed, knocked by a decline in the US housing market – ultimately leading to enormous government bailouts and a global economic recession.

Others have compared the situation to the 1980s – the last time inflation was this high and the US central bank hiked rates in a hurry – which led to years of rolling bank failures in the US known as the savings and loan crisis.

For now, many analysts say they think the shock will be contained.

But the business world was already on edge about whether the economy was headed into recession, which would throw millions of people out of work.

Now the troubles in the banking sector are expected to chill lending. So whatever slowdown was under way is likely to get worse.

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