London (CNN) On March 10, the biggest US bank failure since the global financial crisis played out in real time as a major lender to the technology industry succumbed to a classic bank run.
Silicon Valley Bank customers frantically pulled their money out of the California-based lender before US regulators stepped in to take control. But the collapse has panicked markets, heaping pain on weaker financial institutions already grappling with the unintended consequences of rising interest rates and self-harm.
A week later, a second regional bank in the US – Signature Bank – was closed, a third – First Republic Bank (FRC) — was supported and the first major threat of 2008 to a bank of global financial importance — Credit Suisse — was averted after it was absorbed by UBS.
But relative calm was restored only thanks to the provision of huge sums of emergency money by lenders of last resort – central banks – and some of the industry’s biggest players.
Markets remain on edge: benchmark US and European bank shares have lost 20% and 13% respectively since the close of trading last Wednesday.
What just happened?
Friday, March 10 — The Federal Deposit Insurance Corporation (FDIC) of the US government took control of SVB. It was the biggest bank collapse in America since Washington Mutual in 2008. The wheels had started to break 48 hours earlier when the bank took a multi-billion dollar loss, cashing in US government bonds to raise money to pay depositors. She tried – unsuccessfully – to sell stocks to shore up her finances. This caused the panic that led to his downfall.
Sunday, March 12 — The FDIC closed Signature Bank after draining its deposits from customers who were freaked out by the SVB implosion. Both banks had an unusually high ratio of uninsured deposits to finance their business.
Wednesday, March 15 — After watching shares in Swiss credit (CS) collapse by as much as 30%, the Swiss authorities announced a safety mechanism for the country’s second largest bank. This calmed the immediate market panic, but the global player is not out of the woods yet. Investors and customers worry that there is no reliable plan to reverse a long-term decline in their business.
Thursday, March 16 — First Republic Bank teetered on the edge as customers withdrew their deposits. At a meeting in Washington, US Treasury Secretary Janet Yellen and Jamie Dimon, CEO of America’s largest bank, laid out plans to rescue the private sector. The result was an agreement with a group of US creditors to deposit tens of billions of dollars money in the First Republic to stop the bleeding.
Sunday, March 19 — Switzerland’s biggest bank, UBS, has agreed to buy its ailing rival Credit Suisse in an emergency rescue deal aimed at stemming a financial market panic.
How much does a rescue cost?
Nearly $200 billion so far in direct support from the central bank. By guaranteeing all deposits at Silicon Valley Bank and Signature Bank, the US Federal Reserve is on the hook for $140 billion. Then there is the $54 billion that the Swiss National Bank offered to Credit Suisse in the form of an emergency loan and provided hundreds of billions more to the combined UBS and Credit Suisse Sunday.
The Fed also negotiated record amounts of loans for other banks this week. Banks have borrowed nearly $153 billion from the Fed in recent days, breaking the previous record of $112 billion set during the 2008 crisis.
Banks also pulled nearly $12 billion in loans from the Fed’s new emergency lending program, set up earlier in the week to prevent more bank failures.
The $318 billion the Fed has lent to the financial system in total is about half of what was lent during the global financial crisis.
“But it’s still a big number,” JPMorgan’s Michael Ferroli said in a note to investors on Thursday. “The half-baked view is that banks need a lot of money. The glass is half full that the system is working as intended.”
The banking industry also coughed up billions. JPMorgan Chase, Bank of America and Citigroup are among a group of 11 lenders providing $30 billion in cash infusions aimed at bolstering First Republic Bank’s credibility.
HSBC has reportedly committed more than $2bn to SVB’s UK business, which it bought on Sunday for £1.
Is my money safe?
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 work with 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 being promised 100,000 euros ($105,431) of their deposits back. Joint account holders may receive a total of €200,000 ($210,956) in compensation.
In the UK, depositors can get up to £85,000 ($102,484) back if their bank fails, doubling to £170,000 ($204,967) for joint accounts.
Will all this make it harder to get a loan?
The short answer is yes. Stressed banks will pay much more attention to the creditworthiness of borrowers, whether they are businesses looking for loans or home buyers trying to find mortgages.
“If banks are under stress, they may be reluctant to lend,” US Treasury Secretary Janet Yellen said Thursday in testimony before the Senate Finance Committee. “We can see credit becoming more expensive and less accessible.”
Christine Lagarde, president of the European Central Bank, told reporters on Thursday that “persistently elevated market tensions” could further constrain credit conditions, which are already tightening in response to rising interest rates.
Does this make a recession more likely?
Here’s what Yellen told the Senate committee: “That could make this a source of significant economic downside risk.”
Goldman Sachs said on Wednesday that growing stress in the banking sector has increased the chances of a US recession in the next 12 months. The bank now believes the US economy has a 35% chance of entering a recession within a year, up from 25% before the banking meltdown began.
The world’s second-biggest economy, China, is also struggling despite a burst of activity after the swift lifting 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 in a bid to keep money flowing through the economy.
— Anna Cooban contributed to this article.