The recent bank failures in the United States and Switzerland are causing concern around the world. The global economy is reeling from the risk of collapse.
Fears of another Great Financial Crisis have resurfaced.
Can we rest easy, or are there real reasons for concern?
We address this in this article.
A banking crisis is a specific phenomenon that can affect the entire global economy.
It is characterized by massive withdrawals of deposits that jeopardize the internal convertibility of bank liabilities .
If this happens, customers cannot get their money back, and authorities often step in to ensure these banks can continue operating normally.
Why?
Because globalization means that such bank failures can spread relatively easily to other institutions and ultimately affect the entire system.
The clearest example occurred following the collapse of the U.S. bank Lehman Brothers on September 15, 2008, which triggered the greatest economic crisis in history and also affected Spain, where Bankia had to be bailed out in May 2012.
Keep in mind that, although the rise of alternative financing provides greater flexibility and resilience in the face of these problems, the risk is always there: the collapse of banking institutions shakes the very foundations of the financial system and undermines public confidence.
First, savers are left unable to access their money, which slows down economic activity in the region.
Those affected are not only individuals ( who face real personal tragedies) but also businesses and institutions that suffer as a result of an event that could bring the global economy to a standstill.
In most cases, these crises are due to a gradual decline in banking soundness.
In industrialized countries, the root cause is usually found on the asset side of the balance sheet, as a result of a high percentage of non-performing loans.
Economic instability and fluctuations in real estate prices fuel this dangerous risk.
In developing countries, massive deposit withdrawals are one of the triggers for these failures.
First, we must mention Silicon Valley Bank ( SVB), an institution that has caused significant alarm. Although its business focused primarily on financing emerging technology companies, it invested heavily in government bonds.
When interest rates rose, the value of those bonds fell, and many startups simultaneously withdrew their funds, leading to the bank’s collapse and triggering panic in the global economy.
Credit Suisse, for its part, is a private bank that had been suffering heavy losses over the past two years.
However, it was mismanagement that led to its downfall.
Following the collapse of SVB, market jitters led its depositors to withdraw $416 million.
The rise of alternative financing can serve as a slight buffer against such situations. Contagious bank failures are a consequence of the systemic nature of this sector.
In fact, financial systems are highly interconnected; when turbulence occurs, vulnerable institutions are exposed. And, along with them, the entire global economy.
Fortunately, experts predict that the current situation will be better equipped to withstand these imbalances. Despite the instability and widespread fear, things will gradually return to normal.
Most likely:
1. Some projects will be temporarily shelved.
2. Central banks will slow the pace of interest rate hikes.
This will ease the strain on the market.
As you know, when interest rates rise, money becomes less accessible, which can cause problems for small and medium-sized businesses—something that doesn’t happen if you opt for alternative financing.
Ultimately, bank failures are a cause for concern that requires swift action.
This time, however, all signs indicate that the consequences will be more temporary than we think.
Image from Freepik
Image from rawpixel.com on Freepik