banking crisis
Despite the assurances issued by senior officials in America and Europe regarding the soundness of the banking sector and the financial system, with the aim of allaying investor fears after the unprecedented banking collapses since 2008, we are far from zeroing in on these doubts.
America has more than 4,000 banks, nearly 10,000 banks worldwide that are part of SWIFT and 35,000 financial institutions around the world, hence the paramount importance of the stability of America’s financial sector and what it means for the world.
The fall of Silicon Valley Bank in early March, the biggest bank failure since the 2008 global financial crisis, as well as Signature, in America, and “Credit Sui” in Switzerland, unleashed a wave of market panic that swept the sector in Europe and the United States, undermining confidence and exacerbating fears. Depositors, after the Swiss government, within the bailout deal, wrote off the sub-bonds that fall into the first tier of capital, amounting to $17 billion in full.
Controversy also escalated in America after the collapse of Silicon Valley over deposit insurance, and with depositors rushing to withdraw their money from small banks, Janet Yellen, US Treasury Secretary, said, “Measures will be taken to protect deposits in other banks if the money withdrawal infection increases.”
These matters put us in front of several facts, that the banking sector in America and Europe may face a crisis, through several indications.
The Financial Times says investors have withdrawn $34 billion from US stock funds in 2023. Contract pricing also indicates that investors expect stock volatility for some banks to reach three times normal levels, according to an analysis by RBC Capital Markets.
Analysts at Morgan Stanley also cut profit estimates for regional banks by 20% this year and 30% for 2024.
Deposits at JPMorgan, Wells Fargo, and Bank of America are also expected to have declined by $521 billion from the previous year, the largest drop in a decade, according to Bloomberg analysts’ estimates.
These unrest also weighed on banking stocks, as the “KBW Bank” index fell by 17.37% this year, losing 25% in March alone. Regional banks were the biggest losers during this period, with First Republic Bank shares declining by 89.12%, as of Monday evening.
We are facing an escalating fact that is declining confidence in banks and exodus of funds to other alternative investments, including money market funds. The total amount in these funds rose to $5.2 trillion from $4.59 trillion a year earlier.
Trust is very necessary for banks to carry out their duty to support economic growth through lending for much longer periods, and this confidence was subjected in previous periods to violent tremors, especially during the global financial crisis in 2008, but the situation has changed a lot.
There are two different and more dangerous things in the current crisis of confidence that we are going through. The first is the expansion of instant money transfer from banks on a large scale, which exacerbates withdrawals of funds. The second thing is the spread of social media in an unprecedented manner, which makes the problem greater than ever. Panic is spreading among investors at a faster pace and making it more difficult to control.
Loss of confidence in banks can have a number of important impacts on individuals, companies and the economy in general, including the withdrawal of deposits, which leads to the cessation of operations and the collapse of the bank, and this may have dire consequences for the economy.
Loss of confidence also reduces people’s resort to borrowing and investing in money markets, which lowers economic activity and slows growth.
Among other effects, there is a decline in confidence in financial institutions, and resorting to alternative options for banks. It also lowers stock prices and thus affects the performance of financial markets.
Trust is the most dangerous thing that the financial and banking system can be exposed to, and there is ample evidence of a decline in confidence in American and European banks, and this may be a gateway to broader changes unless this confidence is strengthened through measures, including guaranteeing deposits and ensuring the safety of the sector and the financial performance of banks.
