2023 Bank Collapses and What Happens Next

Introduction and Background:

As 2023 went on, many questions were raised about the stability of banks, especially in the United States. The first signs of instability appeared on March 10th, when the Silicon Valley Bank collapsed, followed by the Signature Bank on the 12th. The next to fail was the First Republic Bank on May 1st. Large concerns have been raised, as the three institutions' assets together amount to $532 billion, which adjusted for inflation is greater than the total assets of the 25 banks that failed in 2008.

When it comes to the causes of the failures, it largely comes down to the increase in the interest rates by the Fed, intended to fight the inflation spike in the year before. However, the increase in the base rate has led to a fall in bond prices, causing an avalanche in the market values of the institutions' capital reserves. In order to stay liquid, SVD and others had to sell a lot of their bonds. The issue with the above is that for any depository to function, they have to be ready for increased withdrawals by clients. If there is a lack of liquidity, assets cannot be turned into cash, and difficulty arises in maintaining sufficient balances to sustain masses of people taking money out.

Impacts of the Crisis in the Short-Term.

The events above had almost instantaneous impacts on the world's financial markets. Panic quickly spread, as the financial crisis of the late 2000s is still fresh in memory, and the public expected the worst. Within days, predictions about a crisis greater than before arose in the news outlet, while the clients of the failed banks could only guess what would happen with their accounts. Some were lucky to have their assets insured by the FDIC, whereas other weren't quite as fortunate.

For some banks, the crisis proved beneficial. Well-structured institutions had an opportunity to acquire the assets of the failed at low prices to increase their reach, though, with added risk from purchasing financially struggling entities. A well-known case of that was HSBC acquiring the UK arm of the SVB for a historical ￡1 on March 13th, only three days after the collapse. In a press release, it was revealed that the UK branch of SVB had loans of ￡5.5 billion and deposits of ￡6.7 billion. Another case of acquisitions amidst the crisis was a large deal between UBS and Credit Suisse. The deal proved to be controversial, as it involved brokering by the Swiss Government.

Long-Term Impact.'

It is, of course, almost impossible to predict what is going to happen with the crisis from now on, however, it must be pointed out, that the impacts on the world will not be nearly as severe as expected. With the world having experience with large-scale financial crises, we are now more prepared than ever before, and it is unlikely that anything will escalate beyond our control, primarily due to FDIC insurance of assets in the US.

On the other hand, there are some measures that are most certainly going to be put in place by the governments. First and foremost, scrutiny for banks, especially smaller ones, will increase, with the most popular tool being the minimum reserve requirement increase. Due to illiquidity being at the heart of the recent failures, banks will be required to maintain a larger percentage of deposit liabilities in cash ready for deposits in the case of future collapses and lack of public trust.

Key Takeaways.

In overview, it is very likely that the events of the crisis stay isolated to the banks that have already failed. FDIC insurance has proved successful in the US by ensuring the clientele from large losses of funds, as Europe remains steady without a large impact from the failures. An increased cautiousness from both commercial and central banks is likely, with a larger degree of scrutiny on smaller, less established banks.

Sources and Credits:

Cover Image by: Francesca Volpi/Bloomberg

“Bank Failures in Brief – 2023.” FDIC. Accessed May 21, 2023. https://www.fdic.gov/bank/historical/bank/bfb2023.html.

Clayton, Tim “2023 Bank Failures Bigger than 2008, US Dollar Braced.” Exchange Rates UK, May 4, 2023. https://www.exchangerates.org.uk/news/38073/2023-05-03-2023-bank-failures-bigger-than-2008-dollar-braced-for-us-economic-impact.html#:~:text=According%20to%20FDIC%20data%2C%20the,of%20%24532%20billion%20in%20assets.

“HSBC Acquires Silicon Valley Bank UK Limited.” HSBC, March 13, 2023. https://www.hsbc.com/news-and-media/media-releases/2023/hsbc-acquires-silicon-valley-bank-uk-limited.