In recent weeks, banks in both the UK and the US have been experiencing turbulence, with emergency meetings being held and central banks offering credit lifelines. While politicians and central banks have declared the situation stable, banking shares continue to fluctuate, causing concern among many people. So, how bad is the situation, and what does it mean for the average person?
The current situation in the US banking sector
In the US, two banks catering largely to the tech sector, Silicon Valley Bank and Signature Bank, have collapsed this month. These are the biggest bank failures in the US since 2008, but they are nowhere near the size of Credit Suisse, the giant Swiss bank that is being taken over by UBS. While no other banks have collapsed, central banks are worried enough to announce new measures to make extra cash available to ensure financial transactions continue as normal.
The Bank of England has been watching closely as Credit Suisse’s fate was determined in a marathon meeting over the weekend. However, it said there was no reason to worry about a knock-on effect on UK banks. The UK banking system remains safe and sound, it said. Both UBS and Credit Suisse have London operations, managing money for wealthy clients and advising on mergers and investments, and there may be some job losses where the two banks’ businesses overlap.
The situation has been caused by rising interest rates, as central banks around the world have been raising the cost of borrowing to try to dampen down rising prices. After years of very low-interest rates, this has come as a shock, and banks holding government bonds have suddenly found their assets are worth less. This has affected the whole banking sector, but smaller banks are more vulnerable.
While there isn’t the same system-wide problem that there was in 2008 when banks around the world suddenly found they were exposed to rotten investments in the US housing market, nervousness around the health of banks is often contagious. If people start to worry about their deposits, they can move them at the click of a mouse, potentially putting a chill on the global economy at a time when it could do without it.
Deposit protection and what it means for you
Ordinary people have little reason to fear for their funds. Deposit protection is in place, meaning that in the UK, £85,000 per person, per institution is protected (or £170,000 in a joint account) under the Financial Services Compensation Scheme. In the EU, protection is similar, and the US government has safeguarded deposits of up to $250,000 for a long time.
Overall, while there is concern about the situation in the banking sector in both the UK and the US, experts believe that the impact of these current troubles will be contained. However, regulators may toughen up the rules further, and banks may pull back on their willingness to lend, potentially putting a chill on the global economy. It’s essential to keep a close eye on developments in the banking sector in both the UK and the US to ensure that the situation remains stable.
To become a successful investor, keeping up with the latest market trends and strategies is essential. Our previous post about the current mini-banking crisis offers valuable insights and tips to help you achieve your financial goals.
