(Please note, this article describes events up to April 2023)
On March 10th 2023, the biggest threat of a global financial collapse since 2008 emerged with the failure of the Silicon Valley Bank (SVB). The sudden collapse of the 16th largest lender in the USA kicked off a firestorm of nerves, first in the USA and then quickly around the globe.
“Two days, later US regulators announced they had also taken control of Signature Bank.”. People scrambled to take their money out before the banks were taken control of by the FDIC, with regulators announcing later that customers of both banks will get all their money back. In the UK, Barclays Bank purchased SVB for £1.
Nearly a week later in Europe, Credit Suisse, Switzerland’s 2nd largest bank, was saved following a late rescue by UBS after its stocks had dropped a staggering 24.4% which forced the Swiss authorities to place a backstop on the bank. While back in the US, JPMorgan Chase and other large banks such as Wells Fargo, Citigroup and Bank of America had to step in to make $30B of deposits at First Republic, another bank that investors feared had the same fate looming as SVB.
“The scale of the massive withdrawals from Credit Suisse and First Republic has only now been revealed. The Swiss banking giant reported this week that $68.8bn had left the bank in the first three months of 2023. In North America, First Republic Bank customers have pulled more than $100bn amid concerns about the health of the global banking system.
The large capital withdrawals are expected to rise until confidence is fully restored in these banks.”
How was Cashbook affected?
The collapse of the SVB had a direct impact on us at Cashbook as we were in conservations with a company to automate their SVB lockbox. That conversation went on immediate hold as they scrambled to restore their banking services to continue to receive customer payments and meet their obligations to suppliers and employees.
Is the worst past or is there more to come?
According to JPMorgan Chase CEO Jamie Dimon, the banking crisis still looms large with the stress on the financial sector caused by the failure of two massive US banks. While there will be repercussions from it for years to come, he added, the recent events are nothing like the 2008 global financial crisis which rocked the entire world economy.
What about a Recession?
Goldman Sachs analysts are predicting a 35% possibility that the US economy plunges into a recession in the next 12 months following the collapse of SVB and Signature Bank, and just this week Federal Reserve documents released indicating this this US banking crisis is linking to indeed fall into a recession. In a bid to curb inflation central banks around the world including US Federal Reserve and the Bank of England have sharply increased interest rates. On the other side of the pound in the EU, however, things are a bit calmer with German Chancellor Olaf Scholz quick to dismiss any panic saying “Generally, I think we are in good shape.”
Are Regulation changes on the horizon?
The big question has become whether there will be any immediate changes to banking regulations to help prevent similar future events as a result of this crisis. Some of the proposals being floated are:
Dimon has cautioned regulators against a knee-jerk reaction and instead has called for more forward-looking regulation. He expanded that regulation should be “less academic, more collaborative” and that policymakers should be more wary of potentially pushing some financial services to non-banks and shadow banks.
Only time will tell, however, what is clear is that banks took a hit. The KBW bank index which tracks the performance of 24 major US banks, is trading near a 30-month low after the recent collapse of the SVB. The S&P 500 has however rebounded by 6.5% since the collapse.
What is certain is that the world will feel the effects and ripples of this crisis for many years to come. Businesses that rely on mid-sized and regional banks will be keeping a closer eye on their banking providers in the months ahead.