Bank Crisis: what happened? Is it over? Is my money safe in the bank?

During the past month there have been some unexpected events that shocked the financial sector and caused panic to the global economy. That's completely reasonable, considering the 2008 disastrous financial crisis that its consequences still affect economies around the globe. But are we in the same situation? Is people's money safe?

Moreover, two of the banks that failed, Silicon Valley Bank in the USA and Credit Suisse in Europe, were considered systemically important by the Fed (Federal Reserve Board). Some quote that "these organizations are too big to fail", but as it seems this is surely not always true.

How it started

Everything started on March 8th, when Silvergate Bank (a cryptocurrency-friendly financial institution) announced that it will voluntarily stop its operations and liquidate its assets. The bank said that this was the result of the high volatility in the crypto-market that caused instability and a high-risk environment.

Before Silvergate, many other crypto-related companies had gone bankrupt the previous period, including FTX Trading Ltd. which was the 3rd biggest crypto-exchange in the world, recording one million users in July 2021. Most of these companies collapsed because they were in an extremely high-risk market and were unable to manage this risk properly. But the problem this time was that Silvergate Bank was a traditional financial institution backed and insured by the Fed. It was the first time in history that the digital asset space invaded and disturbed the mainstream banking system.

Silvergate's stock rapidly fall 97% from it's all-time high of 204.48 on November 2021.

Domino Effect

Signature Bank's failure was enough to create a chain reaction that affected the bank sector in general. On March 10th, the Californian, Silicon Valley Bank (SVB) collapsed and the Fed took control to ensure the money of depositors. That was the biggest financial institution failure in the United States since the Lehman Brothers and the Washington Mutual collapses in the 2008 financial crisis.

A combination of Silvergate's collapse, high interest rates and obvious risk mismanagement of SVB's administration led depositors to pull out their money. This rapid and out-of-control withdrawal situation (called bank run) left SVB without the necessary liquidity to meet demand. The main reason for this lack of liquidity was the wrong funds allocation. SVB took most of the depositors money and invested them in Treasury Bonds and similar long-term debt assets. The problem is that when interest rates spike, bonds and debts price fall. This led SVB to sell its bonds portfolio in a 1.8 billion dollar loss, creating a vicious cycle that caused more uncertainty and led to 42 billion dollar withdrawal requests. On March 10th, authorities took control and tried to find a buyer for the bank. At first, the Federal Deposits Insurance Corporation (FDIC) insured deposits of up to 250,000$ but two days after Janet Yellen and Fed decided that all deposits would bet kept whole despite their amount in order to avoid further panic.

On Sunday 12th of March, the FDIC took control of a second bank, Signature. The bank's collapse was directly connected to the panic that SVB's failure caused. Of course, Signature Bank also had an unusually high ratio of uninsured deposits, but the fear that was all over the banking system triggered more bank runs.

Credit Suisse

Among all financial institutions failures this year, Credit Suisse's one is by far the biggest one. Since its foundation in 1856, Credit Suisse has been among 30 banks in the world that are considered Globally Systemically Important (G-SI). Before its breakdown it was the second largest financial institution in Switzerland, a country famous for its banking system. The reasons behind its failure are consecutive years of scandals and poor stock price performance. These scandals include two CEO resignations and Iqbal Khan, former Credit Suisse's wealth management boss, who left the company to join UBS, its competitor and biggest bank in the country. During last Summer, the new CEO Ulrich Koerner made announcements of a strategic review after rumors that the bank was about to collapse. This triggered a bank run of 110 billion Swiss francs withdrawals in the final quarter of 2022. To turn this downtrend around, the bank searched for further borrowing of 54 billion dollars, but its top lender Saudi National Bank announced that it can no longer provide it with liquidity due to tight regulation policies.

UBS moved in and bought Credit Suisse for 3 billion francs ( 3.3 billion USD), backed by the Swiss Central Bank, which poured in 260 billion CHF (280 billion USD) in the banking system to prevent a national banking system collapse.

Is it over???

It is important to note that 2023's banking system stress has nothing to do with the 2008's financial crisis. Of course the current banking instability will affect the course of the global economy during the year, but the financial crisis of 2008 was a result of years of lax lending and unbacked credit for mortgage loans that caused a huge housing bubble. Back then, even big systemically important financial institutions weren't well regulated and let people get housing loans that were unable to pay off.

Now things are different and at least large banks are tightly regulated in order to avoid another 2008 situation. The fact that a huge bank such as Credit Suisse failed is reasonably concerning, but its collapse came after years of poor financial performance and scandals that led to loss of confidence.

In addition, nowadays central banks are well aware of the danger and the consequences another 2008 may cause, so they take action really quick to avoid it.

Is my money safe in the bank???

First things first, only a very small proportion of depositors' money are available at a bank. Even big regulated financial institutions are expected to hold around 10% of their deposits as cash. That's the reason why banks heavily rely on the public's confidence, because no bank can achieve to survive a big bank run that demands more than 30-40% of its assets.

In case of a bank collapse, as those mentioned earlier, most central banks insure deposits up to some extent. In the USA the FDIC protects deposits of up to 250,000$, while for countries in the European Union the European Central Bank (ECB) demands an insurance of at least 100,000€. In Switzerland the protection goes up to 100,000 francs and in the UK up to 85,000£. It should be noticed that the amounts that were mentioned are per person, meaning that for joint accounts things are different and in most countries there are higher amounts insured.

Summary

March 2023 was a difficult period for the global banking system and its consequences are not yet in the past. The global economic growth will be hitted by the bank failures and especially those of Silicon Valley Bank and Credit Suisse Bank that had multi-billion dollar worth assets. It is important to remember though, that central banks are better prepared to face challenges in the financial sector and are ready to ensure citizens' and businesses' deposits of up to 250,000$ in USA and 100,000€ in Europe.