The bankruptcy of Silicon Valley Bank in the United States in March 2023 brought to mind the specter of the 2008 economic crisis, especially since the disruptions of the banking sector were not limited to this bank, but extended to other banks in the United States and abroad, and this was accompanied by great pressure on the liquidity of commercial banks and financial lending institutions.

Despite the US government's rapid intervention to reassure global markets of the limitations of the Silicon Valley crisis, its repercussions continued in the United States, with other American banks subsequently declaring bankruptcy, including Signature Bank, First Republic and others.

This worrying situation has also prompted major central banks around the world, including the European Central Bank and the Swiss National Bank, to take urgent action to allay fears, especially as the crisis in the United States coincided with the bankruptcy of Credit Suisse in Switzerland.

These successive events have been described as the most difficult in the global banking sector since the 2008 financial crisis, and experts say they are only a wake-up call for the next major collapse, as global inflation continues to rise, countered by tightening monetary policy by major central banks and raising key interest rates.

Did the US Federal Reserve cause the four banks to collapse?

So what are the threats to global financial systems today? Did the US Federal Reserve actually cause four banks to collapse in one month? What are the potential implications of raising the key interest rate on the stability of the banking sector? Will the world endure another economic crisis after all these turmoil, which began with the Covid-19 crisis, and continues today with the Russian-Ukrainian war?

Silicon Valley Bank. Tech startups bond drops

The bankruptcy of "Silicon Valley Bank" (SVB) in March 2023 caused panic in the United States and around the world, due to the speed of its sudden collapse for everyone, as the bank has been working since 1983 with emerging technology companies that achieve rapid growth rates, and its assets have almost doubled 4 times between 2018-2021, in addition to its classification at the end of 2022 in the sixteenth place among the largest banks in the United States.

Silicon Valley Bank bankruptcy with an estimated loss of $ 209 billion

Before its bankruptcy, the bank's assets were estimated at $209 billion and its deposits exceeded $175 billion, making it the largest bank to go bankrupt in the United States since 2008, when Washington Mutual Bank raised the white flag in the context of the global financial crisis.

The plight of Silicon Valley Bank has been exacerbated since the beginning of 2023, due to the US Federal Reserve's successive decisions to raise the key interest rate to rein in inflation, which led to the rise in the retail bank's liquidity needs to cover the balance sheet gap, and then eventually resorted to financing markets, offering bonds and shares on the eighth of March 2023, but it was unable to raise the target amount of $ 2.25 billion.

Although the collapse of the Silicon Valley Bank came as a shock to many, the Federal Reserve previously warned the bank of "mismanagement" and its inability to deal with fast-growing startups that are also prone to collapse without warning.

Falling banks. Dominoes hit by financial actions

The spark that sparked this crisis was sparked by Silvergate Bank, a small bank known mainly to cryptocurrency dealers, as a wave of billions of dollars of depositors that began in the last quarter of 2022 led the bank to declare bankruptcy, liquidate its business, and return its remaining balances.

US bank group bankrupts after Silicon Valley Bank declared bankruptcy

The bankruptcy of "Silvergate Bank" coincided with the tightening of the US Federal Reserve monetary policy and its continued increase in interest rates, and then the issuance of a report on the bank's situation that worried customers and investors, so they began huge withdrawals of their money from the Startup Bank, which quickly led to its collapse and closure by order of the US authorities.

Thus began the "domino effect" that included "Signature Bank", as the authorities were forced to close it, and then came the turn of "First Republic Bank", ranked 14th among the largest banks in the United States, to enter "JPMorgan" on the line announcing its acquisition of "First Republic" in what was considered a step to chart the path out of the crisis.

The impact of this violent wave of bankruptcy went beyond the US borders, and the Swiss bank "Credit Suisse" (founded 167 years ago) announced a liquidity crisis, with which the "UBS" was forced to intervene through a purchase deal, during which it acquired its smaller rival, "Credit Suisse", in an attempt to avoid additional disruptions in the global banking sector. The European Central Bank then came out to reassure investors and customers about the resilience of the financial sector in the old continent.

The real estate crisis. A game that shook the most powerful American banks

When talking about bank bankruptcies, history goes back to 2008 in the context of the financial crisis that erupted then, and it was described as the worst in the world since the Great Depression of 1929.

Banks were the main reason behind this crisis because of their excessive financing of real estate purchases, taking advantage of the high demand of investors in this field, but this quickly turned out to be just a real estate bubble, which collapsed quickly with many defaulting on their debts, and banks seized their properties, before starting again the journey of searching for buyers, which led to a dramatic drop in real estate prices.

The mortgage crisis coincided with a larger trend in the United States to buy shares of electronic and technology companies, attracting investors and finding it a profitable alternative compared to buying real estate. Especially since the beginning of the new millennium, experts and analysts have predicted a major financial crisis due to the crazy increase in real estate prices.

One of the most prominent consequences of the crisis was the largest collapse in the American history of investment bank Lehman Brothers, after it left assets worth $ 691 billion and 25,19 employees in the wind. Despite the intervention of the US authorities and their rescue of other banks such as Goldman Sachs, the crisis caused a sharp economic contraction due to the cessation of loans, which led to the losses of Americans of about $ <> trillion, and the subsequent economic deterioration whose effects exceeded the US borders to the rest of the world's economies.

Interest rate.. Snowball that knocks down financial institutions

The succession of crises since 2020, when the world entered an unprecedented lockdown due to the Covid-19 pandemic, and then the Russian invasion of Ukraine at the beginning of 2022, caused financial authorities around the world to take tight monetary measures, led by central banks raising the key interest rate, in order to curb inflation, which in 2022 in a number of countries reached its highest levels in the past four decades.

In the US, the US Federal Reserve raised interest rates ten times in one year, bringing the rate in May 2023 to 5.25%, the highest level since 2007. Although energy prices fell relatively at the end of March compared to the second half of 2022, this was not enough to halt the upward trend of the key interest rate.

US Federal Reserve raises interest rate ten times in one year

The US Federal Reserve believes that its measures remain justified, and are relied upon to create a kind of economic recession, because raising the interest rate necessarily leads to a rise in the cost of loans, a decline in demand for them, and an increase in demand for depositing money in banks, which helps to absorb cash liquidity from the market, and theoretically leads to slowing consumption, and reducing prices.

The world's plunge into an expected economic recession, according to the reports of the World Bank and other institutions, due to these measures, which resemble a rolling snowball that is growing in size day by day, especially since the bankruptcies of American banks have increased the negative impact of raising interest rates for banks and the general consumers, despite all efforts to get out of this crisis, which was exacerbated by another problem in May related to the "US debt ceiling" amid fears of the United States defaulting, for the first time in its history, for the payment of its debt dues.

Energy crises. Shadows of Ukraine's war on the Arab economy

The economic difficulties experienced by countries vary due to the strict measures of central banks, the impact of slowing economic growth, and successive global crises, especially since the Russian-Ukrainian war has entered its second year, without any prospects for a settlement of the conflict imminently.

Silicon Valley Bank collapse in 2023

Today, energy prices remain volatile, and warnings of a harsh winter are expected in Europe by the end of 2023 as the flow of Russian gas stops. The U.N.-brokered agreement to export Ukrainian grains across the Black Sea is renewed every two months, and any disruption in the process could exacerbate the food crisis, especially in poor countries and those whose crops have been damaged by successive years of drought.

If Western countries are able to absorb the inflation crisis due to high purchasing power, and spend nearly 800 billion euros during the year 2022 in order to help their people, the countries of the South, on the other hand, suffer from the high cost of living and inflation rates unprecedented in decades, especially countries that do not produce oil and gas, as they have exhausted their budgets due to the import of energy products at high prices over a long period. At the top of these countries are Arab countries such as Egypt, Lebanon, Jordan, Tunisia and Morocco, where net food and energy imports represent between 4-17% of their GDP.

Since 2019, Lebanon has been suffering from one of the worst financial crises in history, while the crisis in Egypt has reached frightening levels, and it is enough to see the magnitude of the continuous decline in the value of the Egyptian pound, as it lost 50% of its value between 2022-2023, with the doubling of interest rates, the scarcity of hard currency, and the increase in external debt to $ 162 billion.

"Central bank madness".. Malian stability in jeopardy

The policy of raising the key interest rate did not remain confined to the United States of America, but extended to most countries of the world, especially Europe and the Middle East and North Africa. Despite warnings of the devastating effects of the economic recession in the context of the inflation crisis and rising prices, most central banks have followed the US Federal Reserve's policy, and some economic observers have even described it as "central bank madness."

These central banks have focused on reducing inflation to levels of close to 2% by 2025 at the latest, without any regard for financial stability that threatens to collapse. The state banking crisis was a wake-up call, if not a harbinger of a global financial crisis that could be the largest in history.

Continuing to raise interest rates may lead to an economic recession that is difficult to get out of, especially if this policy continues for a long time, with all the possible repercussions on labor markets, corporate and state budgets, and this turns into a permanent rise in debt levels and fiscal deficits.

Today, the resilience of the banking sector, along with the financial systems and global stock exchanges, remains the only hope left for the global economy to survive the great collapse, in light of the combination of all the factors that poison the economic environment, which may make the collapse catastrophic.

Observers believe that the continued tightening of central bank policies, and the occurrence of a recession in the growth of the global economy, may cause a crack in this wall of resilience, especially since the shock caused by the bank crisis in March 2023 in the United States was strong, and may be devastating if it extends to other major banks that are still accumulating profits to this day, and attracting depositors who have lost confidence in small and regional banks.