- Natalie Sherman
- Economics Editor – New York
Federal authorities in the United States announced control of the “Silicon Valley” bank, in what was considered the largest financial collapse of a bank in the United States since 2008.
When the US President himself tells people that their money is safe, it means that the government takes the financial collapse seriously.
Joe Biden’s assurances came after the collapse of two American banks. But this is not only about the United States, as the value of shares in many banks around the world has declined.
How bad is the situation, and what does that mean to you?
What happens to the banks, and do they collapse?
Since the tenth of March /In March, two banks collapsed in the United States, Silicon Valley and Signature, which is considered the largest bank failure since 2008.
The two banks cater to corporate needs and have ties to the technology industry, which has been struggling due to the sharp declines in the cryptocurrency markets and the resulting jitters among investors.
When Silicon Valley Bank SVB, the 16th bank in the US, announced that 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 In less than 48 hours, nearly a quarter of the bank’s funds had been withdrawn.
After the panic reached Signature Bank, the authorities said they were guaranteeing all deposits at both banks, not just the $25,000 required by law.
The failures of both banks came days after a third bank specializing in cryptocurrencies, Silver Gate Bank, was exposed. What forced him to close.
US Treasury Secretary Janet Yellen commented on the matter, and said, “We felt that there were serious risks that the infection had caused a rush to withdraw from other than banks.”
Will this lead to Collapse other banks?
A bank run occurs when many customers rush to withdraw their money at the same time, and there are concerns that other banks may be at risk.
In the United States, stocks fell in mid-sized banks, as small-cap investors fear for their businesses, while wealthy clients shift their money to other banks.
Dozens of people lined up in front of a SVB Bank branch in Santa Clara, California trying to get their money.
Larger banks are seen as more stable, since they have a diverse range of clients, including ordinary people who are less sensitive to what happens in business markets, as well as those whose savings are usually less than $250,000.
Analysts at ratings agency Standard & Poor’s say they have seen no evidence in the US that “out of control” withdrawals have become widespread, although withdrawal problems have emerged at a few banks, including the First Republic. in San Francisco.
But in a sign of the tensions, the US Federal Reserve announced an increase in emergency lending to banks looking to shore up their funds. It is similar to what happened in Europe, where the giant Credit Suisse bank that had been in turmoil for years got emergency aid of £45 billion from the Swiss Central Bank as a lifeline.
Why are banks collapsing now?
All this is happening against the backdrop of a much larger global change, namely the sharp rise in the cost of borrowing in the past year.
Central banks around the world, including the US Federal Reserve and the Bank of England, have been raising interest rates in an effort to slow the economy and relieve pressure that is driving prices higher.
These rises in interest rates contributed to the problems facing the Silicon Valley Bank, as it became difficult for its novice customers to borrow money, and made them withdraw their financial deposits at a faster pace.
But the rise in interest rates – a huge turnaround after years of low-cost borrowing – created a much bigger problem, hurting the value of long-term bond investments that banks bought when interest rates were low.
In the United States alone, unrealized bank losses approach $620 billion. These losses are not a problem if banks manage to own the bonds, but it becomes more difficult if the banks need to raise funds in a hurry.
In Japan – which is the largest holder of US bonds – the authorities there raised the issue months ago. Meanwhile, analysts in Europe downplayed the scale of the problem.
On Friday, analysts at US financial services firm Morningstar described Credit Suisse’s problems as “extraordinary” and stressed that European banks broadly are “strong”.
While the European Central Bank raised interest rates by 0.5 percentage point as planned on Thursday; However, analysts expect that the recent turmoil will prompt the US and British central banks to move more cautiously when they meet next week.
Is my money safe?
For individual depositors, there is no fear for their money, as the US government has always guaranteed deposits that do not exceed the $250,000 limit. In the United Kingdom, this limit is eighty-five thousand pounds sterling.
US President Joe Biden has vowed to do “whatever it takes” to ensure the banking system is safe and to reassure people that their money is safe, while officials in Europe, Japan, Australia and elsewhere have sought to ease anxiety.
US President Joe Biden pledges to do “whatever it takes” to ensure the safety of the banking system
Authorities say laws passed in the aftermath of the 2008 financial crisis mean most banks are in a stronger position to withstand shocks. As the smallest US bank, Silicon Valley was exempted from some of these requirements in 2018, which was a requirement for Silicon Valley Bank. then.
US Senator Elizabeth Warren, a member of the Democratic Party known for her work in the banking sector, says, “This failure comes as a direct result of the weak ability of leaders in Washington to read the financial rules.”
Is this a banking crisis?
For many, the collapses of some US banks brought back the specter of the financial crisis of 2008, when some of America’s largest banks collapsed, due to a downturn in the US real estate market, which necessitated massive government bailouts and led to a global recession.
While others compared the situation with the era of the eighties, which is the last time that inflation was so high, which prompted the US Central Bank to raise interest rates in a hurry at the time, which caused bank failures for years in the United States, with what is known as the “savings and loan” crisis. “.
For now, many analysts believe the shock will be contained. But the business world was already on edge over whether the economy was headed for a recession, which would put millions of people out of work.
Problems in the banking sector are now expected to slow down lending. So whatever slowdown is underway it is likely to get worse. .