Emergency meetings, central banks providing financial lifelines, and falling bank shares are all over the news these days.
It makes sense that people are inquiring whether a new financial catastrophe is about to begin.
Politicians, including the prime minister of the United Kingdom, and central banks claim that things are now stable. However, trading in banking stocks has remained volatile.
What does this mean for you and how awful is it?
What is happening with banks and are they collapsing
Since the beginning of March, US regulators have closed and sold three mid-sized US banks: Silicon Valley Bank, Signature Bank, and First Republic. The number of failures is the highest to affect the US since the financial crisis of 2008.
Credit Suisse, a major worldwide player in financial turmoil, is being forced into a rescue plan with rival UBS in Europe.
Customers withdrew money in large amounts out of concern about the security of their accounts, which led to the collapses.
In response to the crisis, central banks took steps to increase the amount of money available to ensure that business as usual continued in the financial sector.Central banks scramble to maintain cash flow.
This type of action was done during the 2008 financial crisis and at the beginning of the pandemic to maintain confidence and ensure that banks could continue to provide loans and pay out to customers who wanted to withdraw money.Some of those measures have been scaled back as anxiety has decreased.
Are UK banks at risk
Bank stock prices have undoubtedly fluctuated as a result of the loss of trust.
Both UBS and Credit Suisse have offices in London where they manage money for high-net-worth clients and provide merger and investment advice. In areas where the businesses of the two banks overlap, there may be some job losses.
The Credit Suisse rescue has made the UK financial sector “safe.”
However, there is no reason to anticipate that the demise of Credit Suisse or the failure of the smaller US lenders will have any further direct effects on UK banks.
Following the failure of First Republic on May 1, a UK representative for the Treasury issued a statement that read, “The UK banking system remains safe, sound, and well capitalised.” The spokeswoman stated that US authorities should handle the catastrophe.
Why is this happening now
The unrest is a result of central banks, particularly those in the US and UK, raising interest rates significantly in an effort to slow the rise in prices last year.
That surprised me because interest rates have been extremely low for years.
The value of the debt that banks retain that was issued when interest rates were lower has decreased.
Their balance sheets were not sturdy enough to withstand the moves when customers started withdrawing money in a panic.
When Silicon Valley Bank stated in March that it needed to raise money, the suspicions were aroused. Silicon Valley Bank serviced to the tech industry and was damaged as the sector declined. Worries grew, finally bringing down First Republic and Signature Bank a few days later.
Credit Suisse had its own issues, including years-old mistakes in risk management, scandals it was involved in, including money laundering, and a significant loss last year.
But even though it received a $50 billion (£41 billion) emergency lifeline from the Swiss National Bank, it too found itself in a sudden downward spiral in March as worried customers moved their money to other banks.
The average person has little cause to worry about their finances.
Deposit protection is in place in the extremely unusual event that a bank or building society really fails.
This translates to £170,000 in a combined account or £85k per individual, per institution in the UK. Therefore, under the Financial Services Compensation Scheme, if you had £85,000 in one bank and another £85,000 in a bank that has a separate licence, your money would be safe even if both went bankrupt. If you get a large temporary infusion of money, such as an inheritance, there is also a higher temporary cap of £1 million for six months.
Similar protection is provided in the EU, and the US government has historically protected deposits up to $250,000. In the