Financial markets are casting a nervous eye to the US as its banking system suffers the most significant failures since the global financial crisis of 2008. In this article we cover what is happening in the US banking system and the potential implications for financial markets across the globe, including in Australia.
The shut down of Silicon Valley Bank
The US financial regulator (the Federal Deposit Insurance Corporation, FDIC) was forced to step in on March 10 when there was a run of customers attempting to withdraw their funds out of Silicon Valley Bank (SVB). There were fears that SVB had a liquidity problem. They specialised in lending to the high-risk tech start-up sector.
They run of customer withdrawals forced SVB to cash out long-term US government bonds at a multibillion-dollar loss to pay their customers. The US government shut down the Bank and guaranteed customer deposits to stem the withdrawal panic.
The shut down of Signature Bank and bailout of First Republic Bank
Just two days after SVB was shut down, FDIC was forced to take the same action with Signature Bank, after its customers rushed to withdraw in a similar state of panic. Once again, customer deposits were guaranteed by the US government. Between SVB and Signature Bank guarantees, the US federal government (already mired in record levels of debt) has provided a staggering $140 billion worth of bank customer guarantees.
First Republic Bank became the next to be affected in the US banking sector, but the US government organised a private sector rescue funding package to boost its cash flow.
Tremor felt in the Swiss banking sector
Bank shares began to tumble as news of the failures quickly spread and panic set in. One of the largest share price falls (30%) was recorded by Credit Suisse. It was subsequently bought by its major Swiss competitor, UBS, who in turn received hundreds of billions of dollars in support from the Swiss National Bank (Switzerland’s central bank) to ensure its stability.
Could a similar situation happen in Australia?
Individual deposits of up to $250,000 in any licensed financial institution operating in Australia are protected by the federal government under the Financial Claims Scheme.
This Scheme is designed to prevent a run of customer withdrawals when financial markets experience turmoil.
What are the implications for financial markets?
The major implications of financial market turmoil are:
- a tightening of lending policies by financial institutions.
- downward pressure on bank share prices (often a significant component of investor’s share portfolios due to generally perceived low risk).
- the price of investment bonds falls.
What should you do with your investments?
You should regularly review your investment strategies and it is even more important to do so when market conditions change. We are likely to experience investment market turbulence in the months ahead. Our expert team of financial planners at Wilson Pateras can help you to review your portfolio in these turbulent times and provide you with appropriate advice.
Contact us to day to find out how we can help you.
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