Bank crash: answers to the 5 most pressing questions

NY
CNN
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The banking crash last week left us with more questions than answers. The stunning collapse of two US banks and the loss of investor confidence in Credit Suisse sent the market into wild swings and left Wall Street in a dead end.

During CNN’s primetime special “The Banking Crash: Inside the Crash of the SVB,” experts discussed how best to understand what’s going on in the fast-paced and confusing environment for financial institutions.

Here are five questions the experts answered on Wednesday evening.

Former Treasury Secretary Larry Summers told CNN that despite the dire headlines, now is not the time for consumer panic.

“I don’t think this is the time to panic or worry,” Summers said. “It’s not 2008 where people have to worry about where they can get their money… It’s absolutely not.”

“American money is safe,” he said.

CNN’s chief business correspondent Christine Romans says it’s not a repeat of the 2008 global financial crisis because banks don’t carry toxic assets.

“They can’t take it anymore,” Romans explained. “They no longer have all this garbage, this rubbish on the balance sheet. They need to have the best capital and big banks need to pass stress tests.”

However, Romans noted that smaller banks like SVB are not subject to the same scrutiny from regulators as their larger counterparts.

“There was a ruling on the dispute about whether some of these small banks were allowed to not participate in all … the rules, and perhaps this made them more vulnerable,” Romans said.

Some context: These post-Great Recession rules set stricter rules for the banking industry. But small and medium banks Those with assets below $250 billion, such as the SVB, were exempt from some of the stringent capital requirements that apply to larger institutions, as well as the obligation to undergo an annual review of their ability to withstand financial stress from the Federal Reserve.

Since Silicon Valley Bank’s bankruptcy on Friday, its customers have been filled with fear. But by Monday, they could breathe a sigh of relief—the Treasury Department, the Federal Reserve, and the Federal Deposit Insurance Corporation. said over the weekend that every customer would be curedeven beyond the $250,000 FDIC insured.

While this was welcome news for account holders, the unusual move raised questions from some who wondered why the FDIC changed its rules for SVB and its clients.

“I do think there is a bit of moral hazard here,” said Lynette Halfani-Cox, CEO of AskTheMoneyCoach.com, referring to the idea that banks will take on more risk if they think they will be bailed out.

Why did the FDIC make this decision? The federal government didn’t want the SVB’s failure to have a “domino effect,” Khalfany-Cox said. “Federal regulators considered them to be in the ‘systemic risk’ category, so they granted an exemption.”

You may hear economists and market analysts refer to “moral damagewhen discussing last weekend’s bailout of two US banks, Silicon Valley Bank and Signature.

“Moral hazard” is sort of an academic shorthand for the idea that banks (or other organizations) take on more risk if they believe they will eventually be bailed out.

For example, some argue that SVB should have been allowed to fail—that the pain of the consequences would outweigh the disadvantages of clients losing their money and startups going bankrupt. Of course, others point out that the risk of the collapse of the 16th largest US bank and possibly the bankruptcy of its technology industry clients could be far-reaching and potentially devastating.

With all the panic in the market, it’s getting harder to buy a house, especially if government regulators like the Federal Reserve crack down on banks in the wake of the SVB crash. The Fed has also used a historic rate hike to keep inflation in check, and most economists expect this to continue.

“I really think that based on what we’ve heard from the Fed, interest rates are likely to continue to rise,” said Vivian Tu, a former JPMorgan trader.

“On top of that, I think a lot of people are very concerned, ‘Hey, if I’m saving money for a down payment, is it safe to put that money in the bank?’