2023 was definitely a shaky financial year as we deal with inflation that is slowly going down, and yet we still haven’t experienced lowered prices on goods, the government is still not lowering the interest rate, hoping for a soft landing (which will probably never happen), and if that wasn’t enough, we had a banking crisis that could lead to a domino effect.
But how can banks collapse in modern times? Do we now have regulations to prevent that from happening, and aren’t banks observed by the government?
Well, as we saw, banks can collapse. In fact, not just any banks, but some pretty big banks that had a lot of money in circulation.
So, what does this mean for the banking sector and the entire economy? Should we expect another collapse in the near future?
Banking Crisis
The whole situation in the banking sector began when Silicon Valley Bank, Silvergate, and Signature Bank, the top 3 crypto-friendly lenders collapsed within a week. This is quite strange but explainable.
One bank collapse leads to a domino effect where people get scared for their money and they go to withdraw them. This causes other banks to fail since most of the money they have to operate has been withdrawn.
The banking crisis, which was controlled well had an impact on the entire banking sector, and other banks felt the effect. Banks like First Republic narrowly escaped the same scenario, and the situation quickly spread to Europe, leading to the downfall of Credit Suisse, which is an institution included in the list of Global Systemically Important Banks.
Even other banks in the eurozone (Deutsche Bank) went under pressure as investors started to dump their shares.
So, in order to control the crisis, the obvious step is for governments and central banks to step in and rescue banks. The economic impact will be far greater if other banks start to fail, compared to bailing out those that struggle.
Although this might have been the right step, it received a lot of backlashes from the public as people were angry that the government was using taxpayer money to bail out private institutions. However, the US government claimed that they were non-taxpayer bailouts similar to the ones implemented during the 2008 financial crisis.
But even if the bailout isn’t coming from taxpayers, people will be impacted indirectly through inflation.
Can All Banks Be Saved by Governments?
Well, not really. If we take the banking crisis from Switzerland, we can see why. In order to get the crisis under control the government required UBS, (Switzerland’s biggest bank) to buy their long-time rival Credit Suisse (which was facing financial problems) for $3.25 billion.
But, this raised another issue. Maybe the situation in Switzerland is currently under control, but with the forced marriage of both banks, UBS’s market share could now exceed more than 30 percent. Additionally, their total assets are now worth $1.7 trillion, which is twice as large as Switzerland’s GDP.
So, what if another banking crisis is on the horizon?
Who will bail UBS? Most people would say that this bank is currently too big to fail, but anything can happen. I would argue that this bank is currently too big to bail, which is scarier.
Can a New Bank Crisis Happen in the Near Future?
It is quite hard to predict a banking crisis. As we all remember last March, the situation with the banking sector went from good to horrible in a few days.
But one thing is for sure. The Banking crisis from 2023 really left a mark on the global banking sector.
First and most importantly, the customer trust went out the window. And in a financial industry like a bank, trust is the most important thing. This will definitely send shock waves in the future, as people are prepared to take drastic measures even for small changes or negative news.
That’s why banks immediately started earning that trust and clearing the situation. It is really important for banks to earn people’s trust once again, as that will ensure the liquidity of the banking sector.
On top of that, the banking sector is advancing with the introduction of platforms like Genome bank, that provide online banking options.
We are definitely still in a disruptive economy where governments still fight inflation to the point where we can enter a recession or depression. There are speculations that the US government will start to decrease interest rates on their first meeting this summer, which will increase the money flow into the economy.
As for the banking crisis, it could happen, but it will be mainly fueled by the fear that people have about the banking sector. Fortunately, since the banking crisis in 2023, governments and banks have done a really good job of earning back that trust.
How Can a Bank Fail?
Well, there are many different reasons why banks can fail but it all comes down to how they manage risks. If one bank has a higher risk exposure and fails, this is a domino effect where people take out their money from other banks fearing the same scenario, causing a liquidity problem for the other bank.
And that can be the birth of a new banking crisis.
In last year’s case, most banks failed just because of high indebtedness, unreasonable exposure to liquidity risk, mismatch between assets and liabilities, poor investment performance, and excessive risk-taking.
Can this happen again? – Absolutely. However, governments wouldn’t want another banking crisis to happen, which is why they keep a close eye on banks right now.
Final Words
So, should you prepare for another banking crisis? – Not really. It seems that the effects of last year’s banking crisis are slowly fading away and won’t impact the sector much in the future.
Additionally, there are some signs that the global economy is recovering, and with the government lowering interest rates, people will start spending money more which will eventually improve the bank’s liquidity.
There is always a possibility for another banking crisis, but in reality, people shouldn’t live with that fear just because the problem will become self-inflicted which will be the reason for another banking crisis.