Why are banks failing globally and are we heading for a new global financial crisis
The world's major financial corporations are in trouble. The central banks of various countries, which are coming forward to bail out small banks that are going bankrupt, seem to be caught in the vortex themselves, while the stock markets around the world are very volatile. Do you think you've heard it all?
The current situation has led many to wonder if we are on the verge of a repeat of the 2008 global financial crisis.
Although political leaders and central banks in the United States and Europe have been reassuring that their financial systems are strong and stable, signs of panic among investors around the world can be clearly seen in recent days. Key stock markets are witnessing sharp volatility, particularly in the banking sector.
So how serious is this situation and how can it affect you?
What is happening with the banks?
Investment banking company UBS, backed by the Swiss government, took over Credit Suisse on Sunday. Both are large banking corporations with worldwide investment operations.
Swiss banking is renowned for its financial stability, so the collapse of Credit Suisse and its forced merger with UBS has surprised people inside and outside the European country.
It should be noted that earlier the global panic increased after the bankruptcy of two American banks, Silicon Valley Bank (SVB) and Core Signature Bank. Both of these US banks specialize in investing in the technology sector.
Although both bank failures in the US since 2008 are major banking failures, neither was anywhere near the size of Credit Suisse, one of the world's 30 largest banks.
Although none of the above-mentioned banks have gone bankrupt, alarm bells have started ringing in central banks, which have announced new measures to provide additional liquidity to ensure the normal functioning of financial transactions. It has done so only twice in the last 23 years. First during the 2008 financial crisis and then at the start of the Covid pandemic.
The aim is to boost public confidence and ensure that banks can still lend to customers and repay customers who want to withdraw their money from banks.
Why is this happening?
Credit Suisse's problems are long-standing, ranging from years of risk management lapses to scandals such as money laundering, while last year's huge losses have wiped out profits in previous years.
But last week was crucial as the bank found itself suddenly spiraling downward despite a $50 billion emergency bailout provided by the Swiss National Bank, and its clients began moving their funds to other banks.
While the two US banks that failed earlier had their own problems.
It was ironic that an asset that was supposed to be the safest for SVB ended up causing serious problems for it.
Taking advantage of years of low-interest rates, the institution bought massive amounts of US Treasury bonds.
A sudden increase in the value of money in recent months by the Federal Reserve (the Fed) has reduced the value of bonds.
So the bank was forced to find liquidity to guarantee the return of its clients' money, especially technology companies hit by the crisis in the sector after the 2021 bubble, and to pay customers. It had to sell a large portion of its bonds at a loss and before the due date.
As for Signature Bank, it was more affected by the recent fall in the value of cryptocurrencies.
Both US banks found that their balance sheets were no longer strong enough to support the repayment of deposits by their customers.
But there is one common factor that affects all three institutions, including Credit Suisse, and that is the rapid rise in interest rates across the banking sector in general.
Central banks around the world have continued to raise the value of currencies to curb inflation, which has reached double digits in many countries and the highest levels in decades.
After years of low-interest rates, the hike comes as a big shock.
Banks that hold government bonds have seen their prices fall due to rising interest rates and thus suddenly find that their assets are worth less.
The BBC's finance editor Simon Jack explained that the rise in interest rates had 'also affected the value of the safest investments in which banks keep some of their money. This has spooked investors and sent the share prices of all banks plummeting, causing huge losses for the banks.'
The biggest banking corporations on Wall Street have had to provide liquidity to rescue First Republic, another bank specializing in the technology sector based in San Francisco.
And the Federal Reserve has admitted that emergency lending to US banks, in general, has increased.
Is it a banking crisis?
Analysts agree that the problem that plagued the entire banking system in 2008 does not exist today.
At that time, banks around the world suddenly discovered that they had failed investments in the American real estate market.
This led to massive government bailouts, a financial crisis, and a global economic downturn.
Regulations have since been put in place to force banks to hold more liquidity and limit this type of risk.
Most experts believe that the current problems will have a limited impact.
"This is 2023, not 2008," Nobel laureate Paul Krugman said in a column this week. We may not be seeing a series of regular financial crises.
Nevertheless, the world of banking is highly complex and it is difficult to identify new weaknesses in the system. As seen in the current situation of fluctuating interest rates and investor confidence.
In addition, panic about the health of banks is often contagious, and if customers start to worry about their deposits, they can withdraw their money from their bank's website or app in seconds.
However, even without the complete collapse of confidence that characterized the financial crises, we may see regulators tightening rules and banks becoming more reluctant to lend.
This could slow down the global economy, especially at this critical time, when rising prices are putting additional pressure on consumers' pockets.
What will happen to my money?
At least in the US and Europe, citizens should not panic about their savings.
Even in the rare scenario of a bank or building society failing, their deposits are protected.
The US government guarantees the return of all bank deposits up to $250,000.
Asset protection in the US covers a wide variety of products, from checking and savings accounts to prepaid cards and certificates of deposit.
In the case of SVB and Signature Bank, the US government went a step further and fully guaranteed deposits up to $250,000, but no such guarantee above the $250,000 limit. And if another bank fails in the future, it is unlikely to do so again.
Secondly, in the European Union, there is deposit protection for an amount of 100,000 euros, while in the United Kingdom, it is available for an amount of up to 85,000 pounds.
On the other hand, many analysts believe that the current crisis may have other side effects but will not have much negative impact.
The BBC's business correspondent Dharshini David says the results of the market shake-up could dampen the impact of rising living costs.
Mr. David specifically mentioned the drop in oil and gas prices that have been seen during the turmoil of the past few weeks, which has eased the burden on consumers' pockets.
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