Washington — The U.S. and global banking sector are looking at what will come out of Wednesday's Federal Reserve members' meeting, especially on interest rates.
Global financial markets are witnessing turmoil on concerns about the future of the global banking sector, after the collapse of the US banks "Silicon Valley" and "Signature", and the acquisition by UBS of its main rival Credit Suisse, which is troubled in Switzerland.
The turmoil is the biggest of its kind since 2008, when financial markets around the world collapsed before the U.S. government intervened with broad bailouts that enabled the U.S. and global banking sector to recover and prevented its complete collapse.
Al Jazeera Net is trying through a question and answer to explore the depth of the US banking crisis, has it ended, and what are its most important effects?
How to simply understand what happened with Silicon Valley Bank?
Between 2019 and early 2022, interest rates were very low, ranging from 0% to 0.50%. The rule here is that the lower the interest rates of banks, the more it is evidence of market strength and higher rates of investment in projects that bring greater profits than bank interest.
Deposits in Silicon Valley Bank increased, rising from $60 billion in 2019 to $189 billion in 2022, but as the interest rate continued to fall, and the need to operate this huge liquidity deposited in the bank to generate profits more from bank loans or financing startups, the bank looked to invest in other areas that are highly secure and have a good return compared to the low interest rate at the time.
The bank has invested about $80 billion in government bond instruments, which are highly secure debt instruments with an estimated yield of 1.5% on average, of course with very low interest rates close to zero, 1.5% is not bad, only the big problem will come if interest rates start rising.
Unfortunately, this was what actually happened, as of March 2022, the US Federal Reserve raised the interest rate 8 times to counter global inflation, reaching a ceiling of 4.75%, which means that the bank is paying more to depositors, compared to the low returns it receives from its investments.
In other words, the difference began to widen into a crisis in providing sufficient liquidity on the part of the bank to depositors, and to make matters worse, many VC institutions retreated from injecting funding to startups, and then the rate of companies depositing their funds in the bank decreased.
In the end, the bank was unable to meet the requirements of depositors to save their money in light of the lack of liquidity, and the bank decided to sell bonds worth $ 21 billion, incurring a loss of about $ 1.8 billion in the process, in addition to announcing its intention to issue more bonds worth $ 2.25 billion to fill the financing gap.
Thus, the bank had real liquidity problems and tried to delay the time when it announced its inability to refund depositors, and this moment was precisely the beginning of a wave of panic from the bank's customers.
With everyone panicking, press releases were issued to add fuel to the fire, with news that the bank's stock collapsed by more than 70%, and that it had begun a journey of free fall.
By March 9, with a further collapse in the value of the stock, thousands of depositors had asked to withdraw $42 billion worth of deposits in a single day, something that is impossible for any bank, regardless of its financial resources, to meet, exposing it to the phenomenon of "banking crowding", the famous economic phenomenon associated with depositors' panic about the imminent bankruptcy of banks and their inability to return deposits.
What are the Biden administration's outlines for confronting the bank collapse?
US Treasury Secretary Janet Yellen and Federal Reserve Chairman Jerome Powell announced extraordinary measures to stop the potential fallout from the Silicon Valley Bank collapse, including supporting depositors.
For his part, US President Joe Biden vowed to hold accountable those responsible for the bankruptcy of the bank, and reassured Americans, stressing that their deposits are safe.
In a statement, Biden said, "We have worked to address the problems faced by Silicon Valley and Signature banks, and a quick solution has been found that protects Americans."
"I am deeply committed to holding those responsible for this chaos accountable and continuing our efforts to strengthen supervision and regulation of major banks so that we do not find ourselves in this situation again."
The U.S. government, through an increase in emergency lending to banks, injected $318 billion in loans last week, compared with $15 billion the previous week.
After the U.S. government pledged to insure customer deposits of any value, there was opposition from just 50 members of the House of Representatives against any comprehensive federal guarantee for bank deposits above the current $250,<> limit.
What about depositors' unsecured funds?
The federal government, through the Federal Deposit Insurance Corporation (FDIC), guarantees deposits of no more than $250,<>.
As a corporate-first bank, nearly 97% of Silicon Valley Bank's $200 billion deposits were uninsured, with more than $250,<> each, and are essentially corporate members.
However, the U.S. government has pledged to refund all deposits after acquiring the bank, and to establish Silicon Valley Bridge Bank as its replacement.
Will the crisis become global and the 2008 scenario repeated?
It is true that global markets have been turbulent, but there has been no wave of international collapses except for the Swiss bank "Credit Suisse" for reasons unrelated to the crisis in the United States.
The Fed announced the start of daily coordination with a number of major central banks in Britain, Japan, Canada, South Korea, India and France, to provide them with liquidity when needed.
Will the Fed review its monetary policy by raising interest rates after banks are affected?
Experts predict that the Federal Reserve will go ahead with a 25 basis point (quarter of a percent) rate hike, despite the turmoil hitting the US and global banking sector.
The Fed prioritizes maintaining credibility in its fight against inflation, and the interest rate hike aims to calm the economy in general, and therefore reduce the rates of increase in prices, and the bank has already raised interest rates 8 times since the beginning of 2012 to reach 4.75% after it was 0% for many years.
Could other banks collapse?
The bankruptcy of Silicon Valley Bank, the biggest collapse of a U.S. bank since 2008, was preceded by the liquidation of Silvergate, the bank of choice of the cryptocurrency community, and U.S. authorities forced Signature, which ranks 21st by volume, to close.
On the other hand, a group of 11 US banks, led by JPMorgan and Citigroup, pumped $ 30 billion into the troubled First Republic, after facing the risk of a banking collapse, which led to a recovery in financial markets, and pushed shares in First Republic Bank to record a rise of more than 50% in trading on Tuesday, March 21.
Are there any investigations into what Silicon Valley Bank has witnessed?
Yes, the Justice Department has opened an investigation into Silicon Valley Bank's bankruptcy to investigate allegations that the bank's leaders sold their shares just before it collapsed.
The Wall Street Journal reported that the U.S. Securities and Exchange Commission, which oversees financial markets, has already launched an investigation.
Will Congress take any regulatory action to avoid major financial crises?
Yes, the chairman of the Senate Banking Committee, Senator Sherrod Brown, emphasized that Congress should enact new financial regulations after the Silicon Valley Bank collapse.
Brown explained that these rules will enhance stress tests, capital standards, and liquidity at banks. But he noted that the prospects for such a move remained slim.
How have stock prices been affected by these recent developments?
In general, US stocks have lost billions of dollars over the past two weeks, and the Dow Jones index fell by nearly 5%, and banking stocks had the lion's share of these losses, while the tech-dominated Nasdaq index has swung up and down, but has not suffered overall losses since the beginning of this month.