The global banking system has been rocked by a series of failures and takeovers in the past couple of months, sparking fears of a new recession and a loss of confidence in the financial sector. But what exactly occured, and is the worst over?
It all started on March 10, when Silicon Valley Bank (SVB), a major lender to the tech industry, collapsed due to a bank run by its customers who lost faith in its ability to repay its debts. SVB was the biggest US bank failure since 2008, and it sent shockwaves through the markets.
What Is A Bank Run?
A bank run is a scary situation that can occur when a lot of people try to take their money out of a bank at the same time, here's a simple explanation:
- Banks usually don't keep all the money that their customers deposit with them. They use some of it to lend to other people or businesses or to invest in other things. This way, they can make more money and pay very small amounts of interest to their customers.
- But this also means that banks don't have enough cash on hand to pay back all their customers if they all want their money at once. They only keep a small percentage of their deposits as cash in their vaults or at the central bank.
- A bank run occurs when customers lose confidence in a bank and think that it might go bankrupt or run out of money. They rush to withdraw their money before it's too late. This can be caused by rumors, bad news, or other events that make people worried about the bank's health.
- The problem is that when more people withdraw their money, the bank has less cash to pay them. It might have to sell some of its assets quickly, which can cause losses. It may also have to borrow money from other banks or the central bank, which can be expensive or difficult.
- If the bank runs out of cash and can't pay its customers, it might have to close down or be taken over by another bank. This can affect the economy and other banks as well. That's why regulators and policymakers try to prevent or stop bank runs by providing guarantees, insurance, or support to the banking system.
Banking Crisis Fallout
The collapse exposed the weaknesses of other banks that were struggling with rising interest rates and bad investments. Two other US regional banks, Signature Bank and First Republic Bank, also failed or needed a bailout within a week of SVB's collapse. These banks had lent heavily to the real estate and private equity sectors, which were hit hard by the market turmoil.
The biggest shock came on March 17, when Credit Suisse, one of the largest and oldest banks in the world, announced that it was insolvent and agreed to be taken over by its rival UBS. Credit Suisse had suffered huge losses from its involvement in risky financial products and scandals, such as the Archegos Capital debacle and the Greensill Capital fraud.
The crisis has prompted central banks around the world, including the Bank of Canada, to intervene by providing emergency liquidity and support to the banking system. They have also reassured the public that they are closely monitoring the situation and taking measures to prevent further contagion.
The crisis has also raised questions about the regulation and supervision of the banking sector, as well as the impact on the economy and consumers. Some experts have called for more reforms and oversight to ensure that banks are more resilient and transparent. Others have warned that the crisis could affect economic growth, lending activity, interest rates, inflation, and consumer confidence.
Is The Worse Yet To Come?
So, is the banking crisis over? The answer is not clear yet. While some of the most troubled banks have been resolved or rescued, others may still face challenges in the coming months. The banking sector remains under pressure from various factors, such as rising debt levels, low profitability, digital disruption, and geopolitical uncertainty. The recovery of the global economy from the pandemic is also uncertain and uneven.
The banking crisis has shown once again that the financial system is interconnected and interdependent. What occurs in one bank or one country can have ripple effects across the world.
While I'm a big advocate of keeping the vast majority of your wealth out of banks, here's one thing you should know about.
FDIC Insured Deposits
FDIC stands for the Federal Deposit Insurance Corporation. It is an agency of the US government that protects your money in case your bank fails:
- When you deposit money in a bank account, you are lending money to the bank. The bank uses your money to make loans or investments. Sometimes, the bank might lose money or go bankrupt, and not be able to pay you back as we've been discussing.
- FDIC insurance covers your deposits up to $250,000 per depositor, per insured bank, for each account ownership category. This means that if your bank fails, the FDIC will pay you back your money up to that limit.
- You don't have to apply or pay for FDIC insurance. It is automatic when you open a deposit account in an FDIC-insured bank. You can check if your bank is a member of the FDIC by using the BankFind tool.
- FDIC insurance covers different types of deposit accounts, such as savings and checking accounts, certificates of deposit (CDs), and money market accounts. It does not cover other products, such as mutual funds, stocks, bonds, or cryptocurrencies.
- If your bank fails, you don't have to file a claim. The FDIC will pay you automatically.
It's best to be proactive instead of reactive. If you can, diversify the locations where you store your money. You never know which bank that could be hemorrhaging like a cancerous monkey at the seams, ready to collapse.
Matt is the founder of TechMalak. When he's not buried face-deep in the crypto charts you can find him tinkering with the latest tech gadgets and A. I tools. He's a crypto investor and entrepreneur. He uses a mixture of A.I and human thought and input into all his articles on TechMalak, further merging man with machine.