What is happening to banks and why are people talking about a crisis?
Global banks have been in the eye of the storm this week, with fears growing over the stability of the banking sector and some likening the current situation to the 2008 financial crash.
Two events have fuelled the sense of panic. First, the collapse of Silicon Valley Bank in the US, and secondly, woes at Swiss bank Credit Suisse that led it to take a £45 billion emergency loan from the central bank.
But how are these events linked and should we be worried?
– What happened to Silicon Valley Bank and why has it made people worried?
Silicon Valley Bank (SVB) specialised in lending to technology companies and start-ups, but was shut down by US regulators who took control of its assets on Friday.
It marked the second biggest bank failure in the country’s history. As the biggest economy in the world, any issues in the US can easily spark fears of contagion in other countries.
SVB had been hit hit by a rough patch for technology companies in recent months and by the Federal Reserve’s aggressive policy to increase interest rates to try to bring down inflation.
– Aren’t higher interest rates a good thing for banks?
Many big lenders in Britain have racked up large profits over the last year, partly because they are making more money from higher interest rates, which make it more expensive for people to borrow money.
However, high interest rates also affect investments known as bonds.
SVB held billions of dollars worth of government bonds, which are considered safe investments and typical for most banks. But higher interest rates had pushed down the value of these bonds, meaning it incurred losses on its investments.
It prompted investors to question whether banks, particularly smaller, regional lenders, could withstand losses on the bond portfolios caused by rising rates or whether others would suffer a similar fate.
– What has it got to do with Credit Suisse?
Credit Suisse has made the headlines this week, and not for good reasons.
The Switzerland-based, global lender has had a number of issues over the years, which are well-known to investors, having incurred heavy losses and become embroiled in a string of fraud and misconduct scandals.
But the situation took a turn for the worse on Wednesday when its share price fell to its lowest level, and prompted investors to sell shares in other banking stocks amid the panic.
On Thursday it emerged that the lender was going to borrow up to 50 billion Swiss francs (£45 billion) from the Swiss National Bank to shore up its balance sheet.
– So why is it making people so worried?
Susannah Streeter, head of money and markets at Hargreaves Lansdown, said: “Credit Suisse is the first major bank, deemed too big to fail, to take up the offer of an emergency lifeline.
“It highlights the lightning speed of the global fall-out of SVB’s collapse, which has shaken the banking sector and prompted investors spotting weaknesses in other institutions to race for the exit.”
Credit Suisse is also deemed a much bigger concern for the world economy than regional US banks, because it is more globally connected and has a much bigger balance sheet.
– Why are markets talking about another financial crisis?
Some analysts have suggested that the problems with SVB, Credit Suisse and the wider banking industry can be likened to the 2008 financial crash, which was triggered by the collapse of US investment bank Lehman Brothers.
However, others have been keen to stress that large lenders are much stronger financially than they were before 2008.
Ms Streeter said: “Systemic risk to the sector is still considered to be low, as larger banks have built up bigger capital buffers from the financial crisis and have stable deposits, while the coffers of some are believed to have swelled as customers seek out sturdier institutions for their deposits.”
– Are stock markets likely to recover?
European financial markets regained some poise on Thursday after a bruising session on Wednesday.
The UK’s top stock exchange, the FTSE 100, recovered after suffering its worst one-day performance since the start of the pandemic.
But experts said the markets are likely to remain volatile, particularly as investors await interest rate decisions in the coming weeks from the Bank of England and the US.