The news of the past few weeks has been full of reports of emergency meetings, central banks offering credit lifelines, and tumbling bank shares. These developments have left many people wondering if we are on the cusp of another financial crisis.
Politicians, including the UK Prime Minister, and central banks, have been quick to reassure the public that the situation is stable. However, bank shares have continued to fluctuate, fueling speculation about the stability of the banking industry.
So, how bad is the current situation, and what does it mean for the average person? In this article, we will explore the details of what has been happening in the banking sector, and what the implications are for individuals and businesses.
What is happening with banks, and are they collapsing?
One of the most significant events in the banking sector over the past few weeks has been the takeover of Credit Suisse by UBS. While both are giant Swiss banks, Credit Suisse’s investment banking arm operates all over the world. The Swiss banking industry has long had a reputation for financial stability, so Credit Suisse’s slide into uncertainty and the subsequent shotgun marriage to UBS have left the Swiss rather dazed.
While Credit Suisse’s crisis is a blow to Swiss stability, two US banks had already gone under earlier in the month. Silicon Valley Bank and Signature Bank, both catering largely to the tech sector, had collapsed. Although these were the biggest bank failures in the US since 2008, neither was anywhere near the size of Credit Suisse.
No other banks have collapsed since then, but central banks were worried enough to announce new measures to make extra cash available to ensure that financial transactions continue as normal.
Central banks rush to keep cash flowing
During the financial crisis in 2008 and at the start of the pandemic, central banks took action to shore up confidence and ensure that banks could still make loans and pay out to customers who wanted to take their money out. With the current banking crisis, central banks around the world have been taking similar measures to keep cash flowing.
Are UK banks at risk?
The Bank of England has been keeping a close eye on Credit Suisse’s fate, but it has reassured the public that there is no reason to worry about a knock-on effect on UK banks. The UK banking system is well capitalised and funded and remains safe and sound.
Both UBS and Credit Suisse have London operations, managing money for wealthy clients and advising on mergers and investments. However, there may be some job losses where the two banks’ businesses overlap.
While bank shares have had a wobble over the past week, 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.
Why is this happening now?
Credit Suisse’s problems were its own, with missteps over risk management going back years, scandals it was caught up in, including money laundering, and a heavy loss reported last 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.
The US bank casualties faced different challenges. The 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.
However, there is a common factor affecting all three and the banking sector more broadly: sharply rising interest rates. 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 to the banking sector.
As the global banking crisis continues to unfold, it is important to understand the potential impact on individuals and businesses. While central banks are taking action to ensure that cash continues to flow and that banks remain stable, the situation is still uncertain, and there are several factors that could contribute to further instability.
One of the biggest concerns is the potential for contagion. While the collapse of smaller banks in the US may not have a direct impact on UK banks, there is always the risk that problems could spread. The interconnected nature of the global banking system means that a crisis in one country can quickly spread to others.
Another factor to consider is the potential for job losses. While the Bank of England has reassured the public that there is no reason to worry about UK banks, there may be some job losses as a result of the Credit Suisse-UBS merger. This could have a ripple effect on the wider economy, particularly if the financial services sector experiences a downturn.
Perhaps the biggest concern, however, is the impact on individuals and businesses who rely on banks for loans and other financial services. While central banks are taking action to ensure that cash continues to flow, there is always the risk that banks could become more cautious about lending, particularly if they are facing financial difficulties themselves.
For businesses, this could make it harder to secure the funding they need to grow and expand. For individuals, it could make it harder to get a mortgage or other loan. This could have a knock-on effect on the wider economy, as businesses struggle to grow and create jobs, and individuals find it harder to invest in their own futures.
So, how worried should you be about the current banking crisis? While it is important to remain vigilant and aware of the potential risks, it is also important to remember that the banking sector is highly regulated, and central banks are taking action to ensure stability. As always, it is important to stay informed and make informed decisions based on your own financial circumstances.
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