Silicon Valley Bank And Signature Bank: How Bad Is US Banking Crisis And What Does It Mean?

 The value of shares in some banks tumbled all over the world after the collapse of 2 US banks. So how bad is this and what does it mean for you?

When the US president Joe Biden himself goes out of his way to tell People about that their money is safe and they dont need to worry about their deposits, then you know the government is taking a financial crash seriously.

Joe Biden's assurances on Monday March 13 were not just for the clients of the 2 failed banks either. There are wider ramifications, in the United States and across the world.

Here are 5 big and most asking  questions, following the collapse of Signature Bank and Silicon Valley Bank (SVB). 

Is your money safe?

Yes. If your bank is somewhere else other than these 2 collapsed banks that we have mentioned above, your deposits will not be affected at all. These 2 banks were not typical banks serving everyday American households.

Silicon Valley Bank catered largely to start-up tech firms, while another Collapsed Bank "Signature Bank" was a commercial bank that was focusing on corporate customers.

US President Biden sought to reassure Americans about this, saying: "Your deposits will be there when you need them."

Action taken over the weekend by the Treasury Department, Federal Reserve and the Federal Insurance Deposit Corporation (FDIC) meant even people with bank accounts at Signature Bank and SVB will not lose their deposits.

Based on the actions taken by the United States government, these account holders have now been given a rock solid guarantee saying all the funds in the 2 collapsed banks are safe. Many of them did indeed withdraw their money after that guarantee was made.

Meanwhile, HSBC has swooped to buy SVB's UK arm, bringing relief to UK tech firms who warned they could go bust without help.

The move meant Businesses and customers who had been unable to withdraw their money were now able to access it as normal.

Queue of people outside SVB bank branch in Santa Clara, California

What Banks Are In Trouble? 

Bank shares in the United States, Europe and Asia slumped following the collapse of Signature Bank and SVB, as investors fretted about the general state of the banking sector.

Smaller US lenders were particularly hard hit, although they rallied on Tuesday. The initial sell-off came despite them reassuring customers that they had access to enough cash to be able to protect themselves from shocks.

Investors are much worried that the failures of 2 collapsed banks are a sign of troubles at other firms.

Both SVB and Signature Bank had same kind of characteristics, in that their business models were too concentrated in 1 sector. They were also overly exposed to assets whose values came under pressure from rising interest rates.

Since most banks spread their exposure across lots of sectors, and also have plenty of cash on hand, the assumption is that the risk to the rest of the banking sector is low.

However, the failures have highlighted the fact that many banks are riskier than they might look, because many will have sustained losses on their investments in government bonds as interest rates soared, pushing their value down.

That's a prospect investors have been waking up to in recent days, and is 1 reason why bank shares fell.

What Industries Are Hit? 

SVB is a crucial lender for early-stage businesses, so its collapse led to fears about a knock-on impact to many other industries, from climate tech to medical research.

The company is the banking partner for nearly half of US health care companies and venture-backed technology companies that listed on stock markets last year.

And although the UK arm of SVB was small with just over 3,000 business customers, its collapse would have created "a serious risk to some of our most promising companies in technology and life sciences", Said by UK Chancellor Jeremy Hunt. 

One company that was caught up in the fallout was US-based online crafts marketplace Etsy.

Over the weekend, said by company that it had experienced a delay in issuing payments to some sellers related to the collapse of SVB.

It said teams "worked around the clock to implement a solution" and that it was able to issue the deposits on Monday.

Are Taxpayers Funding The Rescue? 

In UK, the government and the Bank of England worked over the weekend to scramble together the HSBC's purchase of SVB, which involved no taxpayer money. HSBC paid just £1 for SVB's UK arm.

In the US, the issue of bank bailouts is a toxic one because anger remains over the Wall Street rescue after the 2008 financial crash.

American regulators have gone even further and created a completely new lending programme. It allows banks that are facing same kind of problems to use some of their financial assets as the means to get a loan from the Federal Reserve, America's central bank.

This newly created programme essentially acts as a backstop to make sure banks will be able to meet all the needs of their depositors.

It was also said by US President Biden that the leadership of any bank that is taken over by the FDIC will be fired, making it clear those responsible will be held responsible. He went further to assure the American people will not pay the price.

"No losses will be borne by the taxpayers. Let me repeat that: No losses will be borne by the taxpayer," Mr Biden said. Instead, the money will come from the fees that banks pay into the Deposit Insurance Fund.

But the reality is most Americans are bank customers. The fees that are charged to banks eventually roll down to the consumer. So even if it's not through their taxes, Americans are in fact, on the hook.

What Does This Mean For Interest Rates?

The Federal Reserve has been aggressively raising interest rates to try and slow down the economy. But rising interest rates were partly to blame for this crisis.

Figures out on Tuesday showed US annual inflation at 6 percent in February, with persistently higher prices highlighting the challenge for the Fed.

Now there is a general nervousness among investors about where the next crisis caused by rising rates could turn up.

Who is it that will be at risk? Some investors and financial analysts are even speculating that the Federal Reserve will stop hiking rates in response to the events of the past few days, or even start cutting.

There is no playbook for this, it is unchartered territory.

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