SVB and Signature Bank: How bad is the US banking crisis and what does it mean?

  • By Samira Hussain & Noor Nanji
  • Business Reporter, BBC News

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Is this the beginning of a financial crisis?

After the collapse of two US banks, the shares of some banks around the world plummeted. How bad is this and what does it mean for you?

When the US President himself goes out of his way to tell people their money is safe, you know the government takes a financial crash seriously.

Joe Biden’s assurances on Monday weren’t just for the customers of the two failed banks either. There are wider implications in the US and around the world.

Here are five of the big questions following the collapse of Silicon Valley Bank (SVB) and Signature Bank.

Is your money safe?

Yes. Banking anywhere other than the two banks that collapsed will not affect your money at all. These two banks were not typical banks serving everyday American households.

SVB primarily catered to start-up technology companies, while Signature Bank was a commercial bank focused on corporate clients.

President Biden tried to reassure Americans on this, saying, “Your deposits will be there when you need them.”

Action taken by the Treasury Department, the Federal Reserve and the Federal Insurance Deposit Corporation (FDIC) over the weekend meant even those with SVB and Signature Bank accounts will not lose their money.

Based on the actions taken by the US government, these account holders have now received a rock solid guarantee that all funds are safe in the two banks. Many of them actually withdrew their money after this guarantee was given.

The move meant that customers and businesses unable to withdraw their funds could now access them as usual.

image source, Getty Images

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People queue outside the SVB Bank branch in Santa Clara, California

Which banks are in trouble?

Bank stocks in the US, Asia and Europe fell following the collapse of SVB and Signature Bank as investors worried about the overall health of the banking sector.

Smaller US lenders were particularly hard hit, although they rallied on Tuesday. The initial sell-off came despite reassuring customers that they had access to enough cash to protect against shocks.

Investors are concerned that the failure of the two banks is a sign of trouble at other firms.

Both SVB and Signature Bank shared similar characteristics as their business models were too sector focused. They were also over-exposed to assets whose values ​​were being pressured by rising interest rates.

As most banks spread their exposure across many sectors and also have ample cash resources, the risk to the rest of the banking sector is believed to be low.

However, the failures have highlighted the fact that many banks are riskier than it might appear, as many will suffer losses on their government bond investments as interest rates soar, depressing their value.

It’s a prospect that investors have been waking up to in recent days and is one of the reasons bank stocks have fallen.

The SVB is a major lender to early-stage companies, so its collapse prompted fears of a knock-on effect for many other industries, from climate technology to medical research.

The company is the banking partner for nearly half of the US venture-backed technology and healthcare companies that went public last year.

And although SVB’s UK arm was small, with just over 3,000 business customers, its collapse would have created “a serious risk to some of our most promising technology and life sciences companies,” said British Chancellor Jeremy Hunt.

One company affected by the fallout was US-based online craft marketplace Etsy.

Over the weekend, the company said there had been delays in paying out payments to some sellers in connection with the SVB collapse.

It said the teams were “working around the clock to implement a solution” and that they were able to issue the insoles on Monday.

Are taxpayers funding the bailout?

In the UK, the government and Bank of England worked over the weekend to secure HSBC’s purchase of SVB, which involved no taxpayers’ money. HSBC paid just £1 for SVB’s UK arm.

In the US, the issue of bank bailouts is toxic as anger rages over the Wall Street bailout following the 2008 financial crash.

American regulators have gone even further and created an entirely new lending program. It allows banks facing similar problems to use part of their financial assets as a means of obtaining a loan from the Federal Reserve, America’s central bank.

This newly created program essentially acts as a backstop to ensure banks are able to meet all of their depositors’ needs.

President Biden also said that the leadership of any bank acquired by the FDIC would be fired, making it clear that those responsible would be held accountable. He went further to assure that the American people would not pay the price.

“The taxpayer bears no losses. Let me repeat that: the taxpayer bears no losses,” Biden said. Instead, the money comes from the fees banks pay into the deposit insurance fund.

But the reality is that most Americans are bankers. The fees charged to banks eventually roll over to consumers. Even if it’s not through their taxes, Americans are actually on the hook.

What does this mean for interest rates?

The Federal Reserve has aggressively raised interest rates to try to slow the economy. But rising interest rates were partly to blame for this crisis.

Tuesday’s data showed US full-year inflation came in at 6% in February, with continued higher prices highlighting the Fed’s challenge.

Now, there is general nervousness among investors about where the next crisis of rising interest rates might appear.

Who will be at risk? Some investors and financial analysts are even speculating that the US Federal Reserve will halt or even start raising interest rates in response to the events of the past few days.

There is no playbook for this, this is new territory.

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