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What do we know about the Silicon Valley and Signature Bank collapse? What do we know about the Silicon Valley and Signature Bank collapse?
(3 days later)
Is this the start of a financial crisis?Is this the start of a financial crisis?
Is this the start of a financial crisis?Is this the start of a financial crisis?
The value of shares in some banks tumbled around the world after the collapse of two US banks. So how bad is this and what does it mean for you?
When the US president himself goes out of his way to tell people that their money is safe, then you know the government is taking a financial crash seriously.When the US president himself goes out of his way to tell people that their money is safe, then you know the government is taking 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 ramifications, in the US and across the world. Joe Biden's assurances came after the collapse of two US banks.
Here are five of the big questions, following the collapse of Silicon Valley Bank (SVB) and Signature Bank. But this isn't just about the US. Shares in many banks have tumbled in value around the world.
Why did Silicon Valley Bank and Signature Bank fail? So how bad is this and what does it mean for you?
Silicon Valley Bank - which specialised in lending to technology companies - was shut down by US regulators who seized its assets on Friday. It was the biggest failure of a US bank since the financial crisis in 2008. What is happening with banks and are they collapsing?
It had been trying to raise money to plug a loss from the sale of assets affected by higher interest rates. Two banks in the US have collapsed since 10 March - Silicon Valley Bank (SVB) and Signature Bank - the biggest bank failures since 2008.
Word of the troubles led customers to race to withdraw funds, leading to a cash crisis. Both catered to businesses and had ties to the technology industry, which has been struggling due to sharp falls in crypto currencies and souring sentiment among investors.
Authorities on Sunday also took over Signature Bank in New York, which had many clients involved in crypto and was seen as the institution most vulnerable to a similar bank run. When the country's 16th largest bank SVB said it needed to raise money, customers panicked and rushed to withdraw their deposits. In less than 48 hours, nearly a quarter of the bank's funds had gone.
Both SVB and Signature Bank specialised in one sector. They were also overly exposed to assets whose values came under pressure from rising interest rates. After the panic spread to Signature, regulators said they would guarantee all deposits at both banks, not just the $250,000 required by law.
What other banks are at risk? The failures came just days after troubles at a third bank, crypto-specialist Silvergate, forced it to wind down.
Bank shares in the US, Asia and Europe slumped following the collapse of SVB and Signature Bank, as investors fretted about the general state of the banking sector. "We felt that there was serious risk of contagion that could have brought down, and triggered runs on, many banks," US Treasury Secretary Janet Yellen said.
Smaller US lenders were particularly hard hit, although they rallied on Tuesday. The initial sell-off came despite them reassuring customers that they had access to enough cash to be able to protect themselves from shocks. Are other banks going to crash?
Investors are worried that the failures of the two banks are a sign of troubles at other firms. A bank run is when many customers rush to withdraw their money at the same time, and there is fear other banks may be vulnerable.
Since most banks spread their exposure across lots of sectors, and also have plenty of cash on hand, the assumption is that the risk to the rest of the banking sector is low. In the US, shares in medium-sized banks have plunged, as investors worry their small business and wealthy customers may transfer large sums of money to other banks.
However, the failures have highlighted the fact that many banks are riskier than they might look, because many will have sustained losses on their investments in government bonds as interest rates soared, pushing their value down.
That's a prospect investors have been waking up to in recent days, and is one reason why bank shares fell.
Is your money safe?
The US government has long guaranteed bank deposits under $250,000 - and if you are like most people, you probably do not have more than that sitting in a bank account.
SVB and Signature had a different set of customers: SVB catered largely to start-up tech firms, while Signature Bank was a commercial bank focusing on corporate customers. Many of those accounts held amounts exceeding that $250,000 level.
But action taken over the weekend by the Treasury Department, Federal Reserve and the Federal Insurance Deposit Corporation (FDIC) meant even those customers will not lose their money.
President Biden said this week that those moves should reassure Americans worried about the banking system: "Your deposits will be there when you need them."
Global bank stocks slump despite Biden reassurances
Lessons learned from failed 'tech bank' SVB
Meanwhile, HSBC has swooped to buy SVB's UK arm, bringing relief to UK tech firms who warned they could go bust without help.
The move meant customers and businesses who had been unable to withdraw their money were now able to access it as normal.
Queue of people outside SVB bank branch in Santa Clara, CaliforniaQueue of people outside SVB bank branch in Santa Clara, California
Are taxpayers funding the rescue? Bigger banks are seen as more stable, since they have a wider variety of customers - including everyday people who are less sensitive to market news and whose savings are usually below the $250,000 limit.
In the UK, the government and the Bank of England worked over the weekend to scramble together the HSBC's purchase of SVB, which involved no taxpayer money. HSBC paid just £1 for SVB's UK arm. Analysts at S&P Global Ratings say they have not seen evidence in the US that "unmanageable" withdrawals have spread widely, despite problems at a few banks, such as San Francisco-based First Republic.
American regulators have tried to sell SVB. They have also created a completely new lending programme. It allows banks that are facing similar problems to use some of their financial assets as the means to get a loan from the Federal Reserve, America's central bank. Multi-billion dollar rescue deal for First Republic Bank
This newly created programme essentially acts as a backstop to make sure banks will be able to meet all the needs of their depositors. Credit Suisse to borrow up to $54bn from Swiss central bank
But the question of whether the government is bailing out a troubled bank remains a controversial political issue, reflecting lingering anger over aid given to Wall Street during the 2008 financial crisis. But in a sign of the strains, the US central bank reported a surge in emergency lending to banks looking to boost their funds. In Europe, giant Credit Suisse, which has been troubled for years, accepted an emergency £45bn lifeline from the Swiss central bank.
President Biden on Monday said the leadership of any bank that is taken over by the FDIC will be fired, making it clear those responsible will be held responsible. He went further to assure the American people will not pay the price. Why are banks collapsing now?
"No losses will be borne by the taxpayers. Let me repeat that: No losses will be borne by the taxpayer," Mr Biden said. Instead, the money will come from the fees that banks pay into the Deposit Insurance Fund. All this is happening against the backdrop of a much bigger, global change - the sharp rise in borrowing costs over the past year.
But the reality is most Americans are bank customers. The fees that are charged to banks eventually roll down to the consumer. So even if it's not through their taxes, Americans are, in fact, on the hook. Central banks around the world, including the US Federal Reserve and the Bank of England, have been raising interest rates to try to slow the economy and ease the pressure pushing up prices.
What industries are hit? The hikes contributed to SVB's issues, making it harder for their start-up customers to borrow money, which left them withdrawing their money at a faster pace.
SVB is a crucial lender for early-stage businesses, so its collapse led to fears about a knock-on impact to many other industries, from climate tech to medical research. But the rise in rates - a huge change after years of low-cost borrowing - has created a much wider problem too, hurting the value of long-term bond investments that banks bought when interest rates were lower.
The company is the banking partner for nearly half of US venture-backed technology and healthcare companies that listed on stock markets last year. In the US alone, banks are sitting on roughly $620bn in unrealised losses.
And although the UK arm of SVB was small with just over 3,000 business customers, its collapse would have created "a serious risk to some of our most promising companies in technology and life sciences", UK Chancellor Jeremy Hunt said. That is not a problem if they can hold onto the bonds. But it makes it much more difficult if they need to raise money in a hurry.
One company that was caught up in the fallout was US-based online crafts marketplace Etsy. In Japan - which has been a big buyer of US bonds - regulators raised the issue months ago. In Europe, analysts have said it's not a big issue.
Over the weekend, the company said that it had experienced a delay in issuing payments to some sellers related to the collapse of SVB. Morningstar analysts on Friday called Credit Suisse's problems "idiosyncratic" and said European banks widely were "solid".
It said teams "worked around the clock to implement a solution" and that it was able to issue the deposits on Monday. The European Central Bank raised rates 0.5 percentage points as planned on Thursday; but analysts expect the recent turmoil to lead the US and UK central banks to move more cautiously when they meet next week.
The millions of 'missing' babies after 2008 crash Is my money safe?
What does the bank collapse mean for interest rates? Ordinary people have little reason to fear for their funds. The US government has long safeguarded deposits up to $250,000; in the UK, the limit is £85,000.
The Federal Reserve has been aggressively raising interest rates to try and slow down the economy. But rising interest rates were partly to blame for this crisis. US President Joe Biden has pledged to do "whatever it takes" to ensure the safety of the banking system and assured people their money is secure, while officials in Europe, Japan, Australia and elsewhere have likewise sought to ease concern.
Figures out on Tuesday showed US annual inflation at 6% in February, with persistently higher prices highlighting the challenge for the Fed. US President Joe Biden pledged to do "whatever it takes" to ensure the safety of the banking system
Now there is a general nervousness among investors about where the next crisis caused by rising rates could turn up. Regulators say rules passed in the wake of the 2008 financial crisis mean most banks are in a stronger position to withstand a shock.
Who is it that will be at risk? Some investors and financial analysts are even speculating that the Federal Reserve will stop hiking rates in response to the events of the past few days, or even start cutting. As a smaller American bank, SVB was exempt from some of those requirements, because the US loosened requirements in 2018 - a change sought by SVB itself.
There is no playbook for this, it is uncharted territory. "This failure was the direct result of leaders in Washington weakening financial rules," said US Senator Elizabeth Warren, a Democrat known for her work on the banking industry.
Is this a banking crisis?
For many, the meltdowns in the banking sector have evoked the spectre of the 2008 financial crisis, when some of the biggest banks in America collapsed, knocked by a decline in the US housing market - ultimately leading to enormous government bailouts and a global economic recession.
Others have compared the situation to the 1980s - the last time inflation was this high and the US central bank hiked rates in a hurry - which led to years of rolling bank failures in the US known as the savings and loan crisis.
For now, many analysts say they think the shock will be contained.
But the business world was already on edge about whether the economy was headed into recession, which would throw millions of people out of work.
Now the troubles in the banking sector are expected to chill lending. So whatever slowdown was under way is likely to get worse.
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