You can’t have failed to have noticed some rather worrying headlines recently, from the collapse of Silicon Valley Bank, which led to HSBC buying its UK arm for just £1, to the £2.5bn takeover of Credit Suisse by UBS, in a move backed by the Swiss government.
Six leading central banks, including the Bank of England, are boosting the flow of US dollars to keep credit flowing to households and businesses.
While these interventions have helped to calm nerves on the financial markets to an extent, there is still an air of volatility at the moment, vividly demonstrated in recent European bank share price movements.
Sector plays down 2008 comparisons
Of course, many of the headlines will bring back unwelcome memories of the global financial crisis in 2008, so it’s only natural to wonder if a brand new banking crisis is just around the corner.
As a result, many prominent organisations, stakeholders and analysts have sought to offer strong assurances to consumers, businesses and investors who may be fearing the worst.
Mark Yallop, former UK chief executive of UBS, told BBC Radio 4’s Today programme, that UBS’s purchase of Credit Suisse reflects challenges at that particular institution, as it had “particular idiosyncratic problems that relate to it specifically [and are] not reflective of broader issues in the banking markets”.
“I think this transaction will definitely stabilise [the bank] and should bring a good degree of confidence back to the banking market more generally,” he said.
The European Central Bank and European Banking Authority, meanwhile, issued a joint statement, in which they insisted that Europe’s banking sector is “resilient, with robust levels of capital and liquidity”.
In the UK, the Bank of England responded to the Credit Suisse takeover by welcoming the Swiss authorities’ steps to “support financial stability”, and Prime Minister Rishi Sunak’s spokesman said the government believes the “UK banking system remains safe and well-capitalised”.
“We have a strong regulatory system and we have taken a number of steps over the past 15 years, together with the Bank of England, to strengthen that system,” the spokesman added.
Lord Turner, chairman of the Financial Services Authority at the time of the global financial crisis, has also commented on recent events and dismissed comparisons with 2008.
Speaking to The Sunday Times, he said banks have much more capital than they did 15 years ago, and that the situation is very different today as the country isn’t at the end of a credit-fuelled property market boom that is about to crash.
What happens next?
Thankfully, the steps taken to ensure a steady supply of dollars, together with the assurances from leading institutions and experts, have helped to soothe nerves on the financial markets.
In both the Silicon Valley Bank collapse and the Credit Suisse takeover, the regulators acted quickly and got ahead of events, rather than allow the situation to spiral out of control and lead to a sense of contagion across the banking sector.
But these events have served as an uncomfortable reminder of how much we rely on financial institutions in every aspect of our lives.
For example, the Bank of England has raised interest rates for ten consecutive months as part of an effort to tackle inflation, which stood at 10.1% in January.
But in a climate of pressure on banks and rising borrowing costs, what will the Bank of England’s Monetary Policy Committee do in its next meeting, and what does that mean for people’s savings, investments, loans and mortgages?
And while we’re on the subject of savings, many will be asking whether or not they’re safe in their high street bank. It’s really important to stress that the system that protects savings in the event of a bank collapse is much, much tougher than it was in 2008. For example, the Financial Services Compensation Scheme protects 100% of the first £85,000 you have saved in one bank, and there are similar protections in the US and European Union.
The intervention also shines a spotlight on deeper problems across the financial sector, particularly in those institutions that were expecting or relying on interest rates staying low.
As Richard Hunter of Interactive Investor has observed: “The scale of the response from central banks at the weekend acknowledges gaps in the system, which will leave many investors unwilling to revisit financial stocks until such time as the full extent of the problem is known.”
The current situation is far from ideal, and there are question marks over future monetary policy in light of the wider economic climate.
Whatever happens over the coming weeks and months, rest assured that we will be at your side every step of the way, giving you the guidance and support you need to make the right financial decisions.