The financial world has not seen a week like this since 2008, with turmoil in the banking sector fueling fears that the global economy is on the brink of another crisis.
For those who didn’t live through the last financial crisis, the rapidly changing landscape can be confusing — even a little unsettling. Want to catch up on everything that’s going on? We’ve compiled a guide to help readers get up to speed when the weekend rolls around.
So far, three U.S. banks — Silvergate Capital Corp., Silicon Valley Bank and Signature Bank — have failed. Shares in First Republic Bank, another large U.S. bank, have fallen more than 70% this week alone. It plunged 33% on Friday even after securing a $30 billion bailout from its larger peers on Thursday to try to stem the turmoil. Analysts expect the uncertainty to continue to weigh on bank stocks.
Meanwhile, Credit Suisse AG, one of 30 global financial institutions designated by the International Financial Stability Board as systemically important, faces a litany of problems.
Central bank leaders around the world, from the Federal Reserve’s Jerome Powell to the European Central Bank’s Christine Lagarde, have reassured the public that the latest turmoil does not portend a repeat of 2008.
But confidence in the global banking system has been shaken and things are still changing rapidly, with Credit Suisse reportedly planning a meeting over the weekend to assess various scenarios for its future.
Silvergate was the first U.S. bank to fail due to its exposure to the faltering crypto industry. That means investors are nervous when Silicon Valley Bank says it wants to raise more than $2 billion to shore up its finances and has sold most of its securities portfolio at a loss.
For more than 40 years, SVB has been the bank of choice for technology start-ups and the venture capital community, riding the industry’s boom to become the 16th largest bank in the United States. But news of its troubles sparked a classic bank run as depositors scrambled to withdraw their cash. Ultimately, the Federal Deposit Insurance Corp. had to take control on Friday, making SVB the second-largest bank to fail in US history.
Signature Bank also experienced a massive deposit outflow as customers grew nervous about its cryptocurrency exposure, prompting state regulators to shut down the New York-area lender over the weekend. Billionaire investor Bill Ackman tweeted Friday that he expects Bank of America to buy Signature next week.
As the crisis brewed, U.S. authorities announced a series of extraordinary measures to support the financial system in an attempt to stem the spread of panic. Still, San Francisco-based First Republic, which caters to the personal banking needs of the tech elite, is also in crisis. Concerns about the stability of regional banks led depositors to move funds to financial institutions deemed too big to fail, with U.S. banks alone taking in more than $15 billion in new deposits in a matter of days.
And it’s not just the US – SVB’s collapse has reverberations around the world. Investors worried about the stability of banks sparked a massive sell-off in global financial stocks, wiping $465 billion off market value in just two days. Already embroiled in scandals, a loss of investor confidence has plunged Zurich-based Credit Suisse into crisis after its largest shareholder said it would not increase its stake. Even after the Swiss central bank offered a lifeline, many questions remained about the banker’s future for the world’s wealthy.
The Fed is trying to bring down decades of high inflation by raising interest rates. In theory, raising interest rates would make it more expensive for individuals and companies to borrow money, putting the brakes on an overheating economy and slowing the pace of rising prices.
High interest rates also push the economy into recession, and fears of a slowdown could force a reckoning in fast-growing industries whose proponents want strong prospects for future growth. That includes the tech sector, which has enjoyed a golden age of low borrowing costs and rapid growth during the pandemic.
A slowdown in the tech sector has hit SVB hard as customers started withdrawing their money. SVB is also affected by rising interest rates on the asset side of its balance sheet: It has invested billions in long-term bonds that lose value when rates rise. When SVB was forced to sell most of its bonds at a loss, it shook client confidence. In response, savers, including prominent venture capitalist Peter Thiel, frantically attempted to withdraw $42 billion in one day.
As it turns out, the San Francisco Fed identified interest rate risk as a key concern for SVB more than a year ago. The Fed has promised to investigate how it supervises the bank.
What does this mean to you?
The recent turmoil in the banking system has significant implications that could change how consumers’ financial decisions are calculated and increase the risk of a recession. According to financial experts, U.S. consumers could face consequences such as reduced credit opportunities, changes in deposit rates or investment losses.
The crash also exacerbated depositors’ concerns about the safety of their funds. If your bank fails, the FDIC guarantees up to $250,000 per depositor in eligible accounts at insured banks. For those who deposit more than this amount, we have some suggestions here.
At least in the short term, some analysts are predicting a pause in rate hikes by the Fed. That would be good news for would-be homebuyers crushed by soaring mortgage rates. However, it could also mean that investors are receiving lower returns on high-yield savings accounts and other cash-like securities this year.
(Aside from the title, this story is unedited by NDTV staff and published via a syndicated feed.)