Global Banking Crisis: What Lies Ahead?

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In March 2023, Silicon Valley Bank (SVB) collapsed, triggering a panic that led to the US government’s Federal Deposit Insurance Corporation (FDIC) taking control of the bank. This marked the most significant banking collapse in the United States since the 2008 financial crisis. Within a week, Signature Bank, a second US regional bank, was shut down, and First Republic Bank (FRC), the third bank, was propped up. Credit Suisse, a bank of global financial significance, was also threatened, but it was taken over by UBS, averting a major crisis.

Central banks and major industry players, acting as emergency lenders, injected massive emergency funds to restore stability and calm. However, markets remain on edge, with benchmark indexes of shares in the US and European banks losing 20% and 13%, respectively, since the close of trading on March 15.

The collapse of SVB occurred as a result of the bank’s effort to sell stocks to strengthen its financial position following a loss of billions of dollars from cashing out US government bonds to gather funds to pay customers who deposited their money. The bank’s collapse prompted a run on deposits at Signature Bank, leading to its closure. The high ratio of uninsured deposits used to fund their businesses made both banks particularly vulnerable.

The collapse of SVB also caused the First Republic Bank to teeter on the brink as customers withdrew their deposits. However, a group of American lenders agreed to deposit tens of billions of dollars of cash into the First Republic to staunch the bleeding.

The rescue has cost more than $400bn so far in direct support, with the US Federal Reserve guaranteeing all deposits at SVB and Signature Bank for $140bn. The Swiss National Bank provided an emergency loan of $54 billion to Credit Suisse and extended a loan facility of $225bn with protection against potential losses, guaranteed by the Swiss state, to UBS.

The Fed approved historic levels of loans to other banks, with borrowing from the Fed reaching almost $153bn in recent days, surpassing the previous record of $112bn established during the 2008 financial crisis. Nearly $12bn of loans from the Fed’s newly created emergency lending program, which was aimed at preventing more bank collapses, were also utilized by banks.

Customers with less than $250,000 in an account at a US bank insured by the FDIC have nothing to worry about, as the deposit is insured. Joint accounts are insured up to $500,000. European countries operate similar programs, with Switzerland insuring up to 100,000 Swiss francs ($108,000) per depositor.

First Republic Bank is receiving a $30 billion cash injection from a group of 11 lenders, including Bank of America, JPMorgan Chase, and Citigroup, to boost confidence in the bank. Yellen warned of a possible recession, while Goldman Sachs raised the likelihood of a US recession to 35% due to banking sector stress. China’s economy is still struggling despite a temporary economic surge, leading to the central bank cutting the reserve requirement ratio to maintain cash flow.

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