Business & Tech

Banking Crisis Explained: Experts Predicting Long-Term Effects, Government Responses

Photo by Mariia Shalabaieva/Unsplash

By Tyler Carroll

Boston University News Service

Financial regulators continue looking for long-term domestic solutions to the fallout of the Silicon Valley Bank and Signature Bank failures, while also trying to stave off foreign economic risk.

Silicon Valley Bank ($212 billion in assets) and Signature Bank ($110 billion assets) were likely not big enough to bring the economy down alone, but they may serve as an alarming signal of the current inflationary stress hitting the markets.

According to Mayra Rodriguez-Valladares, a veteran market consultant with experience managing banking risks, the mismanagement of assets at Silicon Valley Bank drove its bankruptcy, but the fallout could spread to other institutions under the right circumstances.

“Once the news came out that Silicon Valley Bank was in trouble, all these depositors ran to take their deposit out, and immediately other investors and companies started to think, ‘What other banks could be in trouble?’ If the situation intensifies, it could end up being a real problem for the economy at large,” Rodriguez-Valladares said.

It appears that this risk is at the forefront of the Federal Reserve’s attention. Just days after Silicon Valley Bank and Signature Bank closed their doors, bank regulators announced plans to fully reimburse investors who lost funds in an effort to quell any consumer fears and prevent a bank run.

Even though the Federal Deposit Insurance Corporation (FDIC) usually only insures $250,000 per account, and roughly 88% of deposits at Silicon Valley Bank were uninsured according to PBS, the FDIC’s deposit insurance fund will be used to cover investors in full, which could cause substantial impacts to how banks manage risk, according to Rodriguez-Valladares.

“I think the idea of protecting more than $250,000 dollars is a terrible idea, because then bank executives will lend to riskier borrowers, invest in more mortgage backed securities, and yes – take on more risk” which would only cause larger issues in the future that the Fed may not be able to bail out, she explained.

And Rodriguez-Valladares is not the only expert concerned by these developments.

Kevin Coldiron, a Finance Lecturer at the Haas School of Business at UCal Berkeley, is concerned that the recent bank crisis will only exacerbate the inflation currently pressuring the national economy.

“The main risk is the long term prospect of inflation. If there are additional bank failures and the Federal Reserve does have to provide liquidity, then that runs counter to its goals of trying to lower inflation,” Coldiron said.

According to Coldiron, the dramatic increase in interest rates over the past 18 months has crippled investors who had a large amount of outstanding debt. Considering that credit card debt in the United States recently reached an all-time high, many institutions and investors have taken huge losses on loans they borrowed during the COVID-19 pandemic when interest rates were far lower than they are today.

“On the one hand, the Fed is trying to lower inflation by increasing interest rates and tightening economic conditions. On the other hand, increasing interest rates is causing a lot of problems for people who have borrowed money, so the Fed has to bail them out by easing conditions,” Coldiron explained.

The Fed has yet to make any comment on whether or not the recent bank failures would affect its dedication to increasing interest rates, but Coldiron thinks the Fed has to respond by easing conditions.

“Right now just the fall in the stock market is a significant tightening of financial conditions. You could say there’s been an effective increase in interest rates because of this crisis, so I don’t think the Federal reserve should raise interest rates on top of that,” he said.

On top of any domestic banking fears, one of the largest foreign investment banks in the world, Credit Suisse, borrowed up to $54 billion dollars from Switzerland’s central bank to prevent collapse. According to Rodriguez-Valladares, Credit Suisse would be a tsunami compared to Silicon Valley Bank’s puddle.

“The Credit Suisse situation is far more serious than Silicon Valley Bank. Credit Suisse is what we call a globally systemically important bank. It has about 800 billion dollars in assets, so about four times that of Silicon Valley, and it’s also in multiple jurisdictions including the United States,” she said.

As for the $54 billion dollar bailout, it may be too little too late for Credit Suisse. Any signs of bankruptcy for the multinational investment bank would spell disaster for both foreign and domestic markets.

“It’s a good thing that the Swiss Central Bank and Swiss regulators are trying to help Credit Suisse; the problem is this is an 800 billion dollar bank, which is actually the size of the Swiss GDP, so it might be too big to save,” Rodriguez Valladares said.

The next scheduled meeting of the Federal Reserve will take place on March 21, as regulators and experts alike scramble to provide a plan amidst the ongoing uncertainty.

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