Are we looking at a Global Banking Crisis?

The global banking sector has been hit hard in recent days with not one, but four banks either collapsing or on the brink of it, leading to fears of another 2008-like crisis. The speed of these collapses has spooked bank investors and customers, who are now wondering if their banks have undisclosed financial weaknesses. Here is a timeline of the events that have taken place in the last month:

On Friday, March 10, the US government's Federal Deposit Insurance Corporation took control of SVB, the biggest banking collapse in America since Washington Mutual in 2008. Two days earlier, the bank had taken a multibillion-dollar loss cashing out US government bonds to raise money to pay depositors. This triggered a panic that led to its downfall.
On Sunday, March 12, the FDIC shut down Signature Bank after a run on its deposits by customers who were spooked by the implosion of SVB.

On Wednesday, March 15, Swiss authorities announced a backstop for Credit Suisse after its shares collapsed by as much as 30%. This calmed the immediate market panic, but investors and customers are still worried that the bank does not have a credible plan to reverse a long-term decline in its business.

On Thursday, March 16, First Republic Bank was teetering on the brink as customers withdrew their deposits. In a meeting in Washington, US Treasury Secretary Janet Yellen and Jamie Dimon, the CEO of America's biggest bank, drew up plans for a private sector rescue. The result was an agreement with a group of American lenders to deposit tens of billions of dollars of cash into First Republic to staunch the bleeding.

On Sunday, March 19, UBS agreed to buy its ailing rival Credit Suisse in an emergency rescue deal aimed at stemming financial market panic.

On Friday, March 24, Deutsche Bank's shares plunged as investors fretted that regulators and central banks have yet to contain the worst shock to the sector since the 2008 global financial crisis.

What has caused the collapse of these Banks? Is there a contagion effect?

The collapse of Silicon Valley Bank was caused by a run on the bank. The bank was not insolvent or even close to it, but banking is an enterprise that relies as much on confidence as on cash, and if that runs out, the game is over. Moody's was considering downgrading its rating, and the bank's management, with the help of Goldman Sachs, chose to raise new equity from General Atlantic and also to sell a convertible bond to the public.

Unlike SVB, Credit Suisse is a financial behemoth, big enough that it is among 30 banks considered to be of systemic importance to the global economy. Although Credit Suisse has been dogged by concerns over its financial health for years following a raft of scandals, the bank's sale to UBS on Sunday delivered a blow to Switzerland's image as a haven of financial stability and sparked volatility in financial markets.

At the root of the current banking crisis is the tightening of monetary conditions by the Fed and the European Central Bank after years of expansionary monetary policy. In recent years, both the Fed and ECB held interest rates near zero and flooded the economy with liquidity, especially in response to the pandemic. Easy money resulted in inflation in 2022, and both central banks are now tightening monetary policy and raising interest rates to staunch inflation. Banks may need to raise more capital to stay safe and in operation, and in extreme cases, some banks may fail.

In short, the banking sector is facing a crisis of confidence, and customers and investors are understandably worried. The events of the last week serve as a reminder that banking is not just about making money but also about maintaining trust and stability in the financial system.