This article is from the source 'bbc' and was first published or seen on . It last changed over 40 days ago and won't be checked again for changes.

You can find the current article at its original source at https://www.bbc.co.uk/news/business-64951630

The article has changed 11 times. There is an RSS feed of changes available.

Version 7 Version 8
Banking crisis? How worried should I be? Is this a banking crisis - how worried should I be?
(2 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?
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. The news is full of emergency meetings, central banks offering credit lifelines and tumbling bank shares.
Joe Biden's assurances came after the collapse of two US banks. No wonder people are asking: is this the start of another financial crisis?
But this isn't just about the US. Shares in many banks have tumbled in value around the world. Politicians, including the UK prime minister, and central banks, say the situation is now stable. But banking shares have continued to fluctuate.
So how bad is this and what does it mean for you?So how bad is this and what does it mean for you?
What is happening with banks and are they collapsing?What is happening with banks and are they collapsing?
Two banks in the US have collapsed since 10 March - Silicon Valley Bank (SVB) and Signature Bank - the biggest bank failures since 2008. Credit Suisse is being taken over by UBS. Both are giant Swiss banks, but their investment banking arms operate all over the world.
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. Swiss banking has the ultimate reputation for financial stability, so the slide into uncertainty for Credit Suisse, and the shotgun marriage to UBS, have left the Swiss rather dazed.
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. Credit Suisse crisis is a blow to Swiss stability
After the panic spread to Signature, regulators said they would guarantee all deposits at both banks, not just the $250,000 required by law. Two US banks had already gone under this month - Silicon Valley Bank and Signature Bank - both catering largely to the tech sector. While those are the biggest bank failures in the US since 2008, neither was anywhere near the size of Credit Suisse.
The failures came just days after troubles at a third bank, crypto-specialist Silvergate, forced it to wind down. No other banks have collapsed, but central banks were worried enough to announce new measures to make extra cash available to make sure financial transactions continue as normal.
"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. Central banks rush to keep cash flowing
Are other banks going to crash? That is the kind of action that was taken during the financial crisis in 2008 and at the start of the pandemic, designed to shore up confidence and make sure banks can still make loans and pay out to customers who want to take their money out.
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. Are UK banks at risk?
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. The Bank of England admitted it had been watching closely as Credit Suisse's fate was determined in a marathon meeting over the weekend, but said there was no reason to worry about a knock-on effect on UK banks.
Queue of people outside SVB bank branch in Santa Clara, California The UK banking system was "well capitalised and funded, and remains safe and sound" it said.
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. UK banking system 'safe' after Credit Suisse rescue
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. Both UBS and Credit Suisse have London operations, managing money for wealthy clients and advising on mergers and investments and there may be some job losses where the two banks' businesses overlap.
Multi-billion dollar rescue deal for First Republic Bank Bank shares have certainly had a wobble over the past week, as confidence was shaken.
Credit Suisse to borrow up to $54bn from Swiss central bank But there is no reason to expect any further direct impact on UK banks, from either Credit Suisse's demise, or the collapse of the smaller US lenders.
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. Why is this happening now?
Why are banks collapsing now? Credit Suisse had problems all of its own - missteps over risk management going back years, scandals it was caught up in, including money laundering, and last year it reported a heavy loss.
All this is happening against the backdrop of a much bigger, global change - the sharp rise in borrowing costs over the past year. But it found itself in a sudden downward spiral last week, despite a $50bn (£41bn) emergency lifeline from the Swiss National Bank, and its customers began shifting their funds to other banks.
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. The US bank casualties faced different challenges. Signature took a hit from recent big falls in the value of cryptocurrencies, and both found their balance sheets weren't robust enough to cope, when depositors rushed to take their money out.
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. Credit Suisse: Lessons learned from the past?
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. But there is a common factor affecting all three and the banking sector more broadly: sharply rising interest rates.
In the US alone, banks are sitting on roughly $620bn in unrealised losses. Central banks around the world have been raising the cost of borrowing to try to dampen down rising prices. After years of very low interest rates, that has come as a shock.
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. The US central bank has been raising interest rates under chairman Jerome Powell
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. Banks holding government bonds, that go down in value when interest rates rise, have suddenly found their assets are worth less.
Morningstar analysts on Friday called Credit Suisse's problems "idiosyncratic" and said European banks widely were "solid". That has affected the whole banking sector, but smaller banks are more vulnerable.
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. Wall Street's biggest banks organised a whip-round to bail out another tech-focused bank, San Francisco-based First Republic. And the Federal Reserve, the US central bank, said there had been a surge in emergency lending to US banks generally.
Is my money safe?Is my money safe?
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. Ordinary people have little reason to fear for their funds.
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. In the highly unlikely scenario that a bank or building society actually collapses, then deposit protection is in place.
US President Joe Biden pledged to do "whatever it takes" to ensure the safety of the banking system In the UK, that means £85,000 per person, per institution is protected (or £170,000 in a joint account). So, if you have £85,000 in one bank, and another £85,000 in a separately licensed bank, then it is all safe if both went bust, under the Financial Services Compensation Scheme. There is also a higher temporary limit of £1m for six months, if you get a sudden influx of funds, such as an inheritance.
Regulators say rules passed in the wake of the 2008 financial crisis mean most banks are in a stronger position to withstand a shock. Protection is similar in the EU, and the US government has safeguarded deposits of up to $250,000 for a long time.
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.
"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?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. There isn't the same system-wide problem that there was in 2008, when banks around the world suddenly found they were exposed to rotten investments in the US housing market.
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. That led to enormous government bailouts and a global economic recession.
For now, many analysts say they think the shock will be contained. US President Joe Biden pledged to do "whatever it takes" to ensure the safety of the banking system
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. Since then, banks have been ordered to hold more capital and regulations around risk have been tightened. So most experts believe the impact of these current troubles will be contained.
Now the troubles in the banking sector are expected to chill lending. So whatever slowdown was under way is likely to get worse. Still, the world of banking is extremely complicated. It can be hard to identify where new fragilities might lie, until the system comes under pressure, as it did when Liz Truss's government surprised the markets with its new economic strategy in September, and as it is now with higher interest rates, and wavering confidence.
Moreover, nervousness around the health of banks is often contagious. And if people start to worry about their deposits they can move them at the click of a mouse.
Even if we don't see the total breakdown in trust that characterised the financial crisis, we could still see regulators toughening up the rules further and banks pulling back on their willingness to lend.
That could put a chill on the global economy, at a time when it could do without it.
Related TopicsRelated Topics
Stock marketsStock markets
BankingBanking
United StatesUnited States