Explained | The Current Banking Crisis In The US And Europe

By | April 19, 2023

The Federal Reserve began raising interest rates rapidly to combat inflation in the USA, and banks’ portfolio started to lose significant value owing to the largest investments they had made. Amid the financial uncertainties, Silicon Valley Bank (SVB) collapsed in March this year, sending shockwaves across the global financial markets. The fear grew stronger after the failure of Signature Bank as investors and customers were apprehensive of a major financial crisis.

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Why did US banks collapse?

The SVB collapse marked the largest bank failure in 2008 financial. The US regional banks were under pressure as concern grew among customers and investors about the financial health of the banks in the country.

However, the Indian banking system is relatively strong. Some of the factors that contribute to the strength of the Indian banking system is its robust regulatory framework, diversified banking sector and deposit insurance.

What is the meaning of a bank run?

A bank run occurs when a large number of depositors withdraw their funds from a bank in a short period of time, often due to concerns about the bank’s solvency or liquidity. Bank runs typically occur when depositors lose confidence in a bank’s ability to repay their deposits, and may be triggered by rumors, news reports, or other external factors.

A bank run can quickly lead to a bank’s insolvency if it does not have enough cash on hand to meet the demand for withdrawals. This can in turn cause a chain reaction of bank failures as other banks are forced to pay out depositors who have moved their funds to more secure institutions, leading to a broader financial crisis.

To prevent bank runs, many countries have established deposit insurance programs that guarantee a certain level of protection for depositors’ funds. Additionally, central banks can provide liquidity to banks in times of stress to help them meet the demand for withdrawals and avoid insolvency.

What have the regulators done?

After the collapse, the governments and regulators across the world are checking for SVB exposure in their corporate and banking sectors. While the government is trying its hard to pacify investors’ fears, regulators are trying to find new buyers to take over SVB’s domestic lending portfolio. The US president has recently said that the perpetrators will face the consequences.

What is the meaning of insured deposits?

Insured deposits are funds held in a bank or credit union that are protected by deposit insurance. Deposit insurance is a program offered by governments or central banks and it guarantees the safety of a certain amount of deposits in the event of a bank failure.

In India, the DICGC  — an RBI subsidiary – will provide deposit insurance up to Rs. 5,00,000 per customer per bank covering principal and interest.

What happens to deposits of over $2,50,000

In the United States, for example, the Federal Deposit Insurance Corporation (FDIC) provides deposit insurance for up to $250,000 per depositor, per insured bank. This means that if a bank fails, depositors can receive up to $250,000 of their deposits back, even if the bank does not have enough assets to repay all its depositors in full.

Deposits that are typically insured include savings accounts, checking accounts, certificates of deposit (CDs), and money market accounts. However, some types of deposits, such as investment products like mutual funds or stocks, are not typically insured.

Having insured deposits can give depositors peace of mind, knowing that their money is protected in the event of a bank failure. It also helps maintain stability in the banking system, by reducing the likelihood of bank runs and the associated risks of broader financial instability.

Can customers withdraw their deposits, transfer?

Yes, customers can withdraw their insured deposits or transfer them to other accounts or financial institutions in the United States. Deposit insurance does not restrict the ability of customers to access or transfer their funds.

However, it’s important to note that the amount of insured deposits may be limited to the coverage limit established by the deposit insurance program. In the United States, the FDIC provides deposit insurance coverage of up to $250,000 per depositor, per insured bank. Deposits exceeding this limit may not be fully insured and could be subject to loss in the event of a bank failure.

Customers should also be aware of any fees or restrictions that may apply to withdrawals or transfers of their funds, which may be set by their bank or financial institution. It’s a good idea to review the terms and conditions of your account to understand any applicable fees or restrictions.

What is the meaning of the contagion?

In finance, contagion refers to the spread of financial distress or instability from one institution or market to others, often leading to a broader financial crisis. In the United States, financial contagion has been a major concern during times of economic instability, such as the 2008 financial crisis.

What does it mean to businesses with their money in the banks

Businesses may be able to recover deposits up to the deposit coverage limit. Beyond it, they may or may not their funds. This comes down to the liquidation of the bank’s assets and the priority of claims. In this case, the business may need to pursue legal action or negotiate with the bank or its regulators to recover their funds.

In addition, businesses that rely on a failed bank for loans or other financial services may face disruptions or challenges in finding new sources of financing. This can have significant implications for the business’s operations and growth prospects.

What is the meaning of the credit Suisse bailout?

Credit Suisse is a multinational investment bank and financial services company. In recent years, it has faced financial challenges, including losses related to high-risk trading and legal settlements. Recently, Credit Suisse has confirmed that it will accept an $80 billion bailout from the country’s central bank. The package has stemmed fears the bank could go under, after shareholders had initially fled the bank.

Why are banks going through this stress?

One of the most significant factors contributing to bank stress is the broader economic environment. Banks are highly sensitive to changes in economic conditions, such as recessions, interest rate fluctuations, and changes in market sentiment. During times of economic stress, banks may face increased loan defaults, declining asset values, and other challenges that can put pressure on their balance sheets.

The Indian Story

The collapse of American banks is unlikely to have a direct impact on Indian banks. India has its own system of regulatory oversight and deposit insurance, which helps to protect depositors and ensure the stability of the banking system. The Reserve Bank of India (RBI) is responsible for regulating and supervising banks in India, and the Deposit Insurance and Credit Guarantee Corporation (DICGC) provides deposit insurance coverage for bank deposits.

However, in an interconnected world, economic volatility in one large market tends to spill over into other markets, leading to a broader economic slowdown or financial market volatility. For example, a slowdown in global trade or investment could affect Indian exporters or investors, and volatility in global financial markets could affect the value of Indian assets and the availability of credit.

Indian banks hardly have any direct or indirect exposure to SVB or other regional banks in the USA. The Indian banking system is more resilient and insulated due to the supervision of the Reserve Bank of India (RBI). Having said that, some sentiment impact might be visible while American markets continue to churn.

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This article first appeared on WION.

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About Adhil Shetty

Adhil Shetty is the Founder and serves as the Chief Executive Officer of BankBazaar.com. Adhil has a Master’s degree in International Relations with a specialization in International Finance and Business from Columbia University in the City of New York, and a Bachelor’s degree in Engineering from the College of Engineering Guindy, Anna University. Adhil is an expert in Personal Finance (Car loan/Home loan and personal loan) and he majorly consults on investment and spends rationalization for the Indian loan borrowers. His guidance is number based with real time interest rate calculations and hence useful for consumer’s real time query.

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