US Banking Crisis: FDIC Takes Control, Market Panic, and the Impact on Credit Availability
The US banking system has been thrown into a state of turmoil over the past week, with the Federal Deposit Insurance Corporation (FDIC) taking control of Silicon Valley Bank, the second US regional bank Signature Bank being shut down, and the third – First Republic Bank – being propped up. These collapses, combined with the near-collapse of Credit Suisse, have triggered a market panic, with benchmark indexes of shares in US and European banks having lost 20% and 13% respectively since the close of trading last Wednesday.
To restore relative calm, the provision of huge sums of emergency cash from lenders of last resort – central banks – and some of the industry's strongest players has been necessary. The US Federal Reserve is on the hook for $140 billion in guaranteeing all deposits at Silicon Valley Bank and Signature Bank, while the Swiss National Bank offered Credit Suisse $54 billion in the form of an emergency loan. Banks have also drawn on nearly $12 billion of loans from the Fed’s new emergency lending program.
The US Treasury Secretary Janet Yellen and Jamie Dimon, the CEO of America’s biggest bank, drew up plans for a private sector rescue for First Republic Bank, with a group of American lenders agreeing to deposit tens of billions of dollars of cash into it to staunch the bleeding. Meanwhile, HSBC has reportedly committed more than $2 billion to Silicon Valley Bank’s UK business.
The knock-on effects of these banking collapses are already being felt, with stressed banks now paying much greater attention to the creditworthiness of borrowers, whether they’re businesses looking for loans or home buyers trying to find mortgages. This could lead to credit becoming more expensive and less available, as US Treasury Secretary Janet Yellen warned the Senate Finance Committee. Christine Lagarde, president of the European Central Bank, has also expressed concern that “persistently elevated market tensions” could further constrict credit conditions.
China’s central bank is also taking action, making a surprise move Friday to cut the amount of money the country’s lenders are required to hold in reserve in a bid to keep cash flowing through the economy.
Investors in interest-rate futures markets have also seen a nearly 50% chance that the Fed won't increase rates at their March 21-22 meeting, up from 30% on Tuesday, according to data compiled by CME Group.
0. “Global banking suffers worst week since 2008. It ain't over yet” erienewsnow.com, 17 Mar. 2023, https://www.erienewsnow.com/story/48568369/global-banking-suffers-worst-week-since-2008-it-aint-over-yet
1. “Global banking crisis: What just happened?” CNN, 17 Mar. 2023, https://www.cnn.com/2023/03/17/business/global-banking-crisis-explained/index.html
2. “Bank Turmoil Casts Doubt on Fed Raising Rates Next Week; Data Hints at Cooling U.S. Economy” Marketscreener.com, 16 Mar. 2023, https://www.marketscreener.com/news/latest/Bank-Turmoil-Casts-Doubt-on-Fed-Raising-Rates-Next-Week-Data-Hints-at-Cooling-U-S-Economy–43260478/