Banking Crisis 2023, what you need to know to stay safe
Shane Oliver, a prominent economist, says that the failures of banks don’t look like a repeat of the financial crisis, but they do pose risks of spreading.
“Banks tend to fail just before recessions begin,” Joshi says. “Ahead of the recession that began in December 2007, no US bank failed in 2005 or 2006. The first three bank failures happened in February, September, and October of 2007, just before the recession onset.
“Fast forward, and no US bank failed in 2021 or 2022. The first bank failures of this cycle—Silicon Valley Bank and Signature Bank—have just happened. If history is any guide, the start of bank failures presages an economic recession that is more imminent than many people anticipate.”
Read more about How to Invest During a Recession here.
Summary: Banking Crisis 2023
The hard truth about the Banking Crisis 2023
Economist Larry Elliott warns us that even a cut in interest rates by the Bank of England would be too late to prevent output from falling in the coming months. But against a backdrop of falling inflation, plunging global commodity prices, and evidence of mounting financial distress, he warns that any further tightening of policy would be foolish.
Historical banking and Economic Policy
It wasn’t always this way. There was a marked absence of banking crises in the 25 years after the Second World War, a period when banks were much more tightly regulated than they are today and played a more peripheral economic role.
After the Great Depression, reforms like capital controls and separating retail and investment banking in the US were put in place to make sure that governments could pursue their economic goals without worrying about their plans being derailed by runs on their currencies or chaos on the markets.
Over the past 50 years, the financial sector has been liberalised and grown much bigger.
Since the global financial crisis, rules and oversight have been tightened, but not much has changed. Silicon Valley Bank (SVB) was supposed to be a small bank that could operate with less stringent regulation than a bank deemed to be “systemically important”. Yet when it came to the crunch, all the depositors of SVB were protected, making the distinction between a systemic and non-systemic bank somewhat academic. The financial system as a whole is both inherently fragile and too big to fail.
Despite the risks, it seems that there is not the remotest possibility of a return to the curbs on banks that were in place during the 1950s and 1960s. No one in politics wants to take on the very powerful financial sector, no matter how much that would be welcomed.
However, there are costs to not pursuing this course of action.
One is that economies dominated by the financial sector only really deliver for the better off: the owners of property and shares. The second is that the central banks’ stimulus has become a drug that the financial markets can’t get enough of. A third is that when that stimulus is taken away, as it is now, it makes crises in the system much more likely. Which means that eventually more stimulus will be provided, the markets will boom, and the seeds of the next crash will be sown. Hooray.
Too little regulation, too late
Since the 2008 global financial crisis, the U.S. government has tightened its control over the financial system, which, in part, has led to the collapse of Silicon Valley Bank.
The bank invested its customers’ deposits in safe assets like U.S. government treasuries, but when interest rates began to rise, the value of those bonds began to fall.
Additionally, the bank’s deposit base was under pressure due to the weak economic environment, leading to a $1.8 billion loss on a portfolio of Treasury securities it sold to ensure it had enough cash to meet depositors’ needs. After a failed attempt to raise $2.25 billion, depositors began withdrawing their money en masse, triggering a run on the bank. (Pizio, 2023)
Is the solution to the Banking Crisis 2023 cryptocurrency?
Recent events like Celsius, FTX, and bank collapses have shown how BTC can be a safe haven against the threat of central authorities. Gauthier discussed how he believes that people are starting to notice the reality of banks due to the current situation. Many people have the idea that the purpose of banks is to safeguard people’s funds, but this may not be the case. He states that the current state of banks is a crash course in Bitcoin and why it is necessary for the future.
The confidence in banks in the U.S. and Europe has been decimated, and people are scrambling for an alternative to protect their dollars. Enter bitcoin (BTC), an asset that was created for entirely this purpose—a truly decentralised form of money that can’t be controlled by any entity. At first glance, the recent banking crisis seems like the perfect catalyst for a BTC price rally. However, digging a bit deeper into the reasons for the move points us in the direction of liquidity, and more specifically, the lack thereof. While the narrative makes sense and has resulted in a lot of people looking for bitcoin at the exact same time, illiquidity has almost certainly been a strong price propellant.
Bitcoin Booms in the Wake of the 2023 Bank Crisis
The world’s largest cryptocurrency has risen almost 70% so far this year After the implosion of crypto exchange FTX, Bitcoin was all but left for dead, but its recent rally is proving naysayers wrong.
The world’s largest cryptocurrency has risen 21% so far this month on the back of the banking crisis, bringing bitcoin’s rally to almost 70% so far this year. Bitcoin traded above $28,000 on Sunday for the first time since June. (Huang and Caitlin Ostroff, n.d.)
Conclusion: Banking Crisis 2023
It shouldn’t be a surprise to see the average customer flocking to Bitcoin at this time in our history. After all, the creation of Bitcoin was inspired by the severe economic turmoil and financial losses incurred by the general public as a result of the reckless conduct and greed of the big banks.
However, this time around, things are different. Firstly, we already have Bitcoin, which has weathered the storms of the past 18 years. Long forgotten have been the warnings from those in the corporate world who once scoffed that it had no tangible use, was a fad and probably a scam, urging retail investors to stash their money in the stock market.
This time, every man and his shiba inu (lol) currently owns or has owned crypto in some form or another. Which means this time, if you want to see an unprecedented flocking into the crypto space, let’s just wait and see how deep this banking crisis in 2023 extends.
A word of warning, however: if you have substantial financial assets in a banking institution, consider diversification into cryptocurrency and spreading the funds across a variety of banking institutions to avoid losing everything should one of those banks fail.
Banking Crisis 2023 FAQ
How much has the Baking Crisis 2023 cost so far?
More than $400 billion in direct aid has been given so far. The US Federal Reserve is on the hook for $140 billion because it is backing all deposits at Silicon Valley Bank and Signature Bank. The Swiss National Bank also gave Credit Suisse $54 billion in the form of an emergency loan, and the Swiss government gave UBS 209 billion Swiss francs ($225 billion) in loans and protection against possible losses.
How safe is my money?
If you have less than $250,000 in a US bank account insured by the FDIC, you almost certainly don’t need to worry about anything. Up to $500,000 is safe in joint accounts.
Similar programmes are run in European countries. In Switzerland, each depositor can have up to 108,000 Swiss francs insured.
Customers of failed banks in the European Union will get their deposits of up to €100,000 ($105,431) back. Account holders who have a joint account can get a total of €200,000 ($210,956) in compensation.
In the UK, depositors can get back up to £85,000 ($102,484) if their bank fails. If they have a joint account, they can get back up to £170,000 ($204,967).
Will this make getting a loan harder?
Will this make getting a loan harder?
Yes, is the short answer. When banks are in trouble, they will pay a lot more attention to how creditworthy their borrowers are, whether they are businesses looking for loans or people trying to get mortgages.
Does this increase the chances of a recession?
Yes, again. Goldman Sachs said on Wednesday that more stress in the banking industry has made it more likely that the US will go into a recession in the next year.
