Despite assurances from the US president that America’s financial system is secure in the wake of the failure of two US lenders, bank shares in Asia and Europe have plummeted.
Authorities took action to protect customer deposits after the collapse of Silicon Valley Bank (SVB) and Signature Bank, both of which were based in the US.
Joe Biden pledged to take “whatever is necessary” to safeguard the financial system.
Investors worry that the fallout may still affect other lenders.
The Topix Banks share index in Japan fell by more than 7% on Tuesday, setting the index up for its worst day in more than three years.
In midday Asian trading, shares of Mitsubishi UFJ Financial Group, the nation’s largest lender by assets, were down 8.1%.
The share prices of German Commerzbank and Spanish Santander both dropped by over 10% at one point on Monday.
Several smaller US banks lost money even more than their European counterparts did despite assuring their clients that they had more than enough liquidity to weather any storms.
Because of the volatility, there is speculation that the Federal Reserve of the United States will now postpone its plans to keep raising interest rates in an effort to control inflation.
Mr. Biden stated that after the government intervened to fully protect deposits made with Silicon Valley Bank, individuals and businesses would be able to access all of their cash as of Monday.
After their funds were frozen, many business customers were faced with the possibility of being unable to pay their employees and suppliers.
People had been waiting in line outside the SVB branch in Menlo Park, California, all day to access their funds, according to BBC North America Technology Correspondent James Clayton.
They were withdrawing cash in the form of cashier’s checks because the bank no longer supported wire transfers.
Why did the Silicon Valley Bank fail?
Silicon Valley Bank was shut down by US regulators on Friday after they seized its assets. Silicon Valley Bank specialized in lending to technology companies. It was a US bank’s biggest failure since the 2008 financial crisis.
It had been attempting to raise money in order to cover a loss on the sale of assets impacted by rising interest rates. Customers rushed to withdraw money as soon as they heard about the problems, creating a cash shortage.
Authorities also seized control of New York’s Signature Bank on Sunday. This institution was thought to be the most vulnerable to a similar bank run because it had a large number of cryptocurrency-related clients.
Mr. Biden promised that paying for the deposits would come from fees regulators charge banks, not from tax dollars.
US regulators also unveiled a new method for banks to borrow emergency funds in a crisis as part of efforts to regain confidence.
The failures, which followed the demise of another US lender, Silvergate Bank, last week, have raised concerns that they may be an indication of problems at other businesses.
The US government “acted aggressively to prevent a contagion developing,” according to Capital Economics’ Paul Ashworth.
We would emphasize that there is no guarantee that this will work because “contagion has always been more about irrational fear,” he continued.
“The initial rush of relief has been replaced by niggling concerns that the era of high rates might be more difficult for some banks to handle than had been previously thought,” said Danni Hewson, head of financial analysis at the stockbrokers AJ Bell.
Despite Joe Biden’s promise to do “whatever is needed” to stop more dominoes from falling, bank stocks fell in the US.
A political reaction
The failure of SVB has reignited discussions about how much the government should do to regulate and safeguard banks, much like discussions that followed the 2008 financial crisis.
There will be a thorough and open investigation into the collapse, according to Jerome Powell, chair of the US Federal Reserve.
Mr. Biden demanded stricter regulations and emphasized that bank executives and investors would not be exempt.
They consciously assumed a risk because that is how capitalism operates, he said.
Even so, the rescue was deemed “problematic” by Republican Senator Tim Scott, who is viewed as a potential 2024 presidential candidate.
Building a culture of government involvement won’t prevent future institutions from looking to it to step in when they take unwarranted risks, he claimed.
People are concerned about banks once more. There is heated discussion surrounding bailouts once more. It’s not 2008, though.
After the global financial crisis, reforming banks deemed “too big to fail” was the main priority. The majority of today’s issues are concentrated with medium-sized and smaller banks.
Silicon Valley Bank and Signature Bank, two banks that went under, had one thing in common: their business models were overly focused on a single industry, and they were overexposed to assets whose values were under pressure from rising interest rates.
They were criticized for failing to predict this when they ought to have. Jerome Powell, the head of the US Federal Reserve, has gone to great lengths to announce the Fed’s intention to increase interest rates.
The assumption is that the risk to the rest of the banking industry is low because the majority of banks are well diversified and have a large amount of cash on hand. Regulators will still investigate what went wrong and what rules need to be changed despite this.
Furthermore, the pressure on small- and medium-sized banks is still present. It is still uncertain what will happen to the US economy and the battle against inflation.
