Banking crisis: answers to your 5 most pressing questions

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CNN
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Last week’s banking crisis left us with more questions than answers. The meteoric collapse of two US banks and the loss of investor confidence in Credit Suisse led to wild market swings and put Wall Street on edge.

On CNN’s prime-time special, “Bank Bust: Inside the Collapse of SVB,” experts explored how best to understand what is happening in a rapidly changing and confusing environment for financial institutions.

Here are five questions the experts answered on Wednesday night.

Former Treasury Secretary Larry Summers told CNN that despite the scary headlines, now is not the time for consumers to panic.

“I don’t think now is the time to panic or be alarmed,” Summers said. “It’s not 2008, where people had to worry about where they could get their money… It’s absolutely not that.”

“Americans’ money is safe,” he said.

CNN Chief Trade Correspondent Christine Romans said this was not a repeat of the 2008 global financial crisis because banks did not hold toxic assets.

“They’re not allowed there anymore,” Romans explained. “They don’t have all that garbage, that waste on their balance sheets anymore. They must have better capital and the big banks must undergo stress tests.

However, Romans noted that smaller banks like SVB don’t face quite the same regulatory scrutiny as their larger counterparts.

“The verdict fell on the controversy over whether some of these smaller banks were allowed to opt out of all the…regulations, and maybe that left them more exposed,” Romans said.

A bit of background: these regulations enacted in the wake of the Great Recession established stricter rules for the banking industry. But small and medium-sized banks — those with less than $250 billion in assets, like SVB — have been exempted from some of the stringent capital requirements applied to large institutions and from having to pass stress tests. their ability to withstand financial stress by the Federal Reserve. every year.

After Silicon Valley Bank went bankrupt on Friday, its customers were filled with fear. But on Monday, they could breathe a sigh of relief — the Treasury Department, Federal Reserve and Federal Deposit Insurance Corporation had said over the weekend that every customer would be serviced, even beyond the insured $250,000. by the FDIC.

While good news for account holders, this extraordinary decision raised questions for some, who wondered why the FDIC broke its rules for SVB and its customers.

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

As to why the FDIC made the decision it did? The feds didn’t want SVB’s failure “to have a domino effect,” Khalfani-Cox said. “Federal regulators deemed them in the ‘systemic risk’ category, so they granted an exemption.”

You might hear economists and market analysts talk about “moral hazard” when they talk about last weekend’s rescue of two US banks, Silicon Valley Bank and Signature.

“Moral hazard” is somewhat academic shorthand for the idea that banks (or other entities) will 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 fallout would outweigh the inconvenience of customers losing their money and startups going bankrupt. Of course, others note that the risk of letting America’s 16th-largest bank collapse, and potentially letting its tech industry clients fail as well, could have profound and potentially devastating consequences.

With all the panic in the market, it’s getting harder to buy a home, especially if government regulators like the Federal Reserve crack down on banks in the wake of SVB’s collapse. The Fed has also implemented a historic rate hike regimen to control inflation, and most economists expect that to continue.

“I think realistically, from 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 feeling really worried, ‘Hey, if I’m saving up for a down payment, is a bank a safe place to put that money? “”