London CNN —
Last Friday, the biggest U.S. bank collapse since the global financial crisis played out in real time when a major tech lender fell victim to a classic bank run.
Silicon Valley Bank’s customers frantically pulled their money from the California-based lender before US regulators stepped in to take control. But the collapse sent markets into panic mode, inflicting pain on weaker financial institutions already struggling with the unintended consequences of rising interest rates and self-inflicted wounds.
A week later, a second US regional bank – Signature Bank – was shut down, a third – First Republic Bank (FRC) – was bailed out and the first major threat to a bank of global financial importance – Credit Suisse – has been averted, at least for now.
But relative calm was only restored thanks to the provision of huge sums of emergency funds from lenders of last resort – central banks – and some of the industry’s strongest players.
Markets remain tense as the US and European bank share indexes are down 20% and 13% respectively since the close last Wednesday. Wall Street opened lower on Friday, with First Republic shares down about 16%.
Friday, March 10 – The US government’s Federal Deposit Insurance Corporation (FDIC) has taken control of SVB. It was the biggest banking collapse in America since Washington Mutual in 2008. The wheels started turning 48 hours earlier when the bank suffered a multibillion-dollar loss cashing in US Treasury bonds to get money to pay depositors to collect. It tried – unsuccessfully – to sell shares to shore up its finances. That triggered the panic that led to her downfall.
SUNDAY, MARCH 12 – The FDIC shut down Signature Bank after a run on its deposits by customers spooked by the SVB’s implosion. Both banks had an unusually high proportion of uninsured deposits to fund their operations.
Wednesday, March 15 – After Credit Suisse (CS) shares plummeted by up to 30%, Swiss authorities announced a rescue package for the country’s second-largest bank. It calmed the immediate market panic, but the global player isn’t out of the woods just yet. Investors and customers are concerned that there is no credible plan to reverse a long-term decline in its business.
Thursday, March 16 – First Republic Bank found itself on the brink as customers withdrew their deposits. At a meeting in Washington, US Treasury Secretary Janet Yellen and Jamie Dimon, the CEO of America’s largest bank, outline plans for a private sector bailout. The result was an agreement with a group of American lenders to deposit tens of billions of dollars in cash with First Republic to stem the bleeding.
Nearly $200 billion in direct central bank support to date. By guaranteeing all deposits at Silicon Valley Bank and Signature Bank, the Federal Reserve is on the hook for $140 billion. Then there’s the $54 billion that the Swiss National Bank has offered to Credit Suisse in the form of an emergency loan.
The Fed also committed record amounts of credit to other banks this week. Banks have borrowed nearly $153 billion from the Fed in recent days, beating a previous record of $112 billion set during the 2008 crisis.
Banks also drew nearly $12 billion in loans from the Fed’s new emergency lending program, which was put in place earlier in the week to prevent more banks from collapsing.
The $318 billion that the Fed has lent to the financial system in total is about half of what was granted during the global financial crisis.
“But it’s still a big number,” JPMorgan’s Michael Feroli said in a note to investors on Thursday. “The half-empty glass is that banks need a lot of money. The glass half full is that the system is working as intended.”
The banking industry has also spilled billions. JPMorgan Chase, Bank of America and Citigroup are among a group of 11 lenders providing the $30 billion cash injection to boost confidence in First Republic Bank.
HSBC has reportedly committed more than $2 billion to SVB’s UK operation, which was bought for £1 on Sunday.
If you have less than $250,000 in an FDIC-insured US bank account, you almost certainly have nothing to worry about. Joint accounts are insured up to $500,000.
European countries operate similar programs. In Switzerland, up to 100,000 Swiss francs ($108,000) are insured per depositor.
Customers of failed banks in the European Union are promised 100,000 euros of their deposits. Joint account holders can receive compensation totaling €200,000 ($210,956).
In the UK, depositors can get up to £85,000 ($102,484) back if their bank fails, which doubles to £170,000 ($204,967) for joint accounts.
The short answer is yes. Stressed banks will pay much more attention to the creditworthiness of borrowers, whether they’re businesses looking for credit or homebuyers trying to find mortgages.
“When banks are under stress, they may be reluctant to lend,” US Treasury Secretary Janet Yellen told the Senate Finance Committee on Thursday. “We could see credit becoming more expensive and less available.”
European Central Bank President Christine Lagarde told reporters on Thursday that “persistently heightened market tensions” could further constrain credit conditions, which were already tightening in response to rising interest rates.
Yes again.
Here’s what Yellen also told the Senate committee: “That could make this a source of significant economic downside risks.”
Goldman Sachs said Wednesday that mounting stress in the banking sector has increased the likelihood of a US recession within the next 12 months. The bank now estimates that the US economy has a 35 percent chance of sliding into recession within a year, up from 25 percent before the banking sector meltdown began.
The world’s second-largest economy, China, is also sputtering despite a surge in activity after the rapid end of draconian Covid lockdown measures late last year.
In a surprise move on Friday, China’s central bank cut the amount of money the country’s lenders must hold in reserve to keep money flowing through the economy.
— Anna Cooban contributed to this article.
