The news is replete with emergency meetings, central banks providing credit lifelines, and falling bank stock prices.
No surprise people are wondering if this is the beginning of a new financial crisis.
Politicians, such as the prime minister of the United Kingdom, and central banks assert that the situation is now stable. However, financial stocks have remained volatile.
How negative is this, and what does it imply for you?
What is occurring and are institutions collapsing?
Since the beginning of March, US regulators have closed and sold three mid-sized US banks: Silicon Valley Bank, Signature Bank, and First Republic. The disasters are the largest to strike the United States since the financial crisis of 2008.
In Europe, Credit Suisse, a troubled global powerhouse, is being taken over by rival UBS in a rescue transaction.
Customers with concerns about the security of their funds withdrew their money en masse, precipitating the failures.
As a response to the crisis, central banks have taken measures to ensure that normal financial transactions continue.
This type of action was taken during the 2008 financial crisis and the beginning of the pandemic to restore confidence and ensure that banks can continue to make loans and pay out customers who want to withdraw money.
As concerns have diminished, some of these measures have been reduced.
Are UK banks at risk?
As confidence was rattled, bank stocks have unquestionably fluctuated.
Both UBS and Credit Suisse have operations in London, managing money for affluent clients and advising on mergers and investments. Where the two banks’ businesses overlap, there may be employment losses.
But there is no reason to anticipate any additional direct effects on UK banks from Credit Suisse’s demise or the failure of smaller US lenders.
“The UK banking system remains safe, sound, and well-capitalized,” a Treasury spokesperson said following the failure of First Republic on 1 May. The spokesperson described the collapse as “an issue for U.S. authorities.”
Why does this occur now?
The turmoil is a result of central banks, including those in the U.S. and the U.K., significantly raising interest rates last year to combat rising prices.
After years of exceptionally low-interest rates, this comes as a surprise.
The value of banks’ assets that were issued when interest rates were lower has decreased.
When customers panicked and began withdrawing funds, their balance sheets were unable to withstand the movements.
Silicon Valley Bank, which catered to the tech industry and was harmed by the sector’s slowdown, prompted fears in March when it disclosed it needed to raise capital. A few days later, Signature Bank and subsequently First Republic collapsed as a result of the fear.
Credit Suisse: Have you learned from your mistakes?
Credit Suisse had its problems, including years of risk management blunders, involvement in controversies involving money laundering, and a significant loss last year.
Despite receiving a $50bn (£41bn) emergency lifeline from the Swiss National Bank, the bank experienced a sudden downward spiral in March as customers transferred funds to other institutions out of fear.
Are my funds secure?
People have little reason to dread their financial security.
In the extremely unlikely event that a bank or building society fails, protection for deposits is in effect.
In the United Kingdom, this amounts to £85,000 per person, per institution (or £170,000 for joint accounts). Therefore, if you have £85,000 in one bank and another £85,000 in a separately licensed bank, your money is protected under the Financial Services Compensation Scheme if both banks fail. If you get a significant bequest, the cap is £1 million for six months.
Similar protection exists in the European Union, and the U.S. government has protected deposits of up to $250,000 for decades. Officials in the United States have proposed increasing protection for business accounts in the aftermath of the crisis.
Is this a similar financial calamity to 2008?
In 2008, global banks suddenly learned they had disastrous US home market assets.
This resulted in massive government bailouts and a global economic downturn.
