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| Four banks have collapsed in the US this year | Photo: AFP |
In 2023, the banking sector of industrialized countries was under pressure. Four banks have collapsed in the United States this year. Especially in the first part of the year, the collapse of two banks within three days caused panic in the financial sector around the world. On the other hand, Credit Suisse was sold in crisis.
The collapse of two banks in the United States within three days has raised fears of a repeat of the 2007-08 financial crisis. But in the end, it didn't happen. In the last part of the year, however, there was no crisis in the financial sector. The collapse of one US bank after another in 2023 was the most talked about topic in the financial sector around the world.
The main reason for the closure of these four banks is deposit crunch. These banks were closed under the supervision of the country's banking sector regulatory body. The four banks are Silicon Valley Bank, Signature Bank, First Republic Bank, and Heartland Tri-State Bank of Elkhart, Kansas.
What happened to these banks was a 'classical bank run' - something that happened during the Great Depression in the 1930s. When everyone goes mad to withdraw money together, not only the bad bank but also the best bank in the world will collapse immediately.
The bank's job is to make financial intermediation. The matter is much like the next Dhane Poddari, i.e. collecting savings from people and lending to the entrepreneur.
Banks know that not all depositors come together to withdraw money. For that, they keep some money in hand and run the business. This is called liquidity management. But suddenly, if almost everyone comes to withdraw money, it's a disaster, in that situation, any bank is bound to collapse. This is the 'bank run'.
The bank collapse began in March. Silicon Valley Bank (SVB) shut down on March 10 in just 48 hours after a collapse in deposits. In large part because of this, Signature Bank collapsed within three days. According to the country's regulatory body, if these two banks were not closed, the stability of the US financial sector would be threatened. At that time, the US regulatory authority Federal Deposit Insurance Corporation (FDIC) temporarily took over the bank.
These banks were of medium quality. The customer base of these banks was not as diverse as that of prestigious banks like JP Morgan. For example, the customers of SVB Bank were mainly startup companies. Signature Bank lends primarily to the housing sector. Also, they recently took special initiatives to attract cryptocurrency customers.
The real reason behind the collapse of these banks is one. That is the inability to perceive risk. In the eight months before the collapse, SV Bank did not have a risk assessment officer or a risk assessment officer. Naturally, the risk was not properly assessed. Although apparently, the balance sheet was good.
Deposits are assets for savers but liabilities for banks. Against that $175 billion deposit, SV Bank bought about the same amount of US government securities, or bonds, considered the safest in the world. But most of them were bought during COVID-19 when bond interest rates were close to zero. During covid tech companies started putting their surplus income in SV banks without question.
As the stock market was uncertain at that time, SVB invested almost all of its deposits in government bonds. Although it is a timely decision, the Bank's Chief Executive Officer (CEO) Greg Baker is not too worried about the changes that need to be made in the investment portfolio in the next completely changed context.
The situation changed when the Federal Reserve began raising policy rates in 2022. Bond interest rates begin to fall. As the market for the bonds was not good, Greg Becker waited until maturity in a more relaxed manner. That wait is tomorrow for him. SVB collapsed when the bank runs or withdrawals of deposits started.
After the 2008 financial crisis, many steps were taken to strengthen the US financial sector. Deposit insurance up to two and a half million dollars to protect customers' deposits is one of them. The Federal Deposit Insurance Corporation or FDIC was created for this very purpose. Compared to that in Bangladesh only up to two lakh taka is insured.
Analysts said that the way the US government and regulatory agencies protected customer deposits in this bank collapse could be a big lesson for Bangladesh. They complain that the interests of various groups and businessmen are seen more than the depositors in the country.
What is most notable about this crisis is that there was no attempt to bail out or sustain troubled banks (as was done in 2008), but regulators took control of the banks before the crisis became more severe. Both Silicon Valley Bank and Signature Bank saw this incident and the bank's management was immediately removed. The government did not try to protect them.
It turned out that the US government was busy ensuring that the customers would benefit rather than saving the owners. Following the announcement of the closure of Signature Bank, the joint announcement of the US Department of Revenue and the Federal Reserve said that this decision was taken to protect the US economy and maintain public confidence. In addition, every bank was sold and the FDIC took over customer deposits after the closure was announced.
The Federal Deposit Insurance Corporation of the United States protects deposits up to two and a half million dollars, not more. However, measures are taken to compensate those who do not have deposit insurance, by evaluating the assets of the bank. The House Financial Services Committee summoned the Treasury Secretary to Capitol Hill for questioning. Cases have also been filed against the bank's CEO and directors.
News of Switzerland's Credit Suisse Bank falling into a liquidity crisis came to light on the heels of the closure of two US banks. Panic filled the global financial sector. Alarmed investors continued to dump shares of the two shuttered US banks and Credit Suisse. As a result, the share price of these companies fell drastically. Depositors also began withdrawing deposits from Credit Suisse.
In this situation, the Swiss central bank tried to sustain Credit Suisse by providing liquidity, but the end was not saved. Switzerland's central bank advises Credit Suisse to merge with UBS AG. Then UBS bought Credit Suisse for $3.23 billion.
The banking crisis of 2023 was not as widespread as that of 2008. A major crisis has been averted by the regulatory agency's actions. Mainly medium-sized banks were hit by the rise in policy interest rates. The exception was Credit Suisse. In this incident, the issue of risk management of medium-sized banks comes to the fore.