Is A Global Crisis Brewing? - Bank

The US seems to have averted a banking crisis that started with the collapse of SVB and Signature Bank, but many fault lines may emerge in the year ahead

When Tim Cook was inaugurating an Apple store and gorging on vada pav in Mumbai, the iPhone maker was silently ushering in a revolution back in the US.

The company, along with Goldman Sachs, was launching a savings account product offering a yield of 4.15%, ten times the average 0.37% returns saving deposits rate offered by US banks. Apple was quick in sensing an opportunity as its product launch also coincided with some top US banks reporting a deposit outflow of $60 billion in their first quarter results.

The start of this year has been pretty scary for the US banking system, which battled its biggest crisis since the 2008 financial crisis when two banks - Silicon Valley Bank (SVB) and Signature Bank - went belly up, triggering a crisis at a few other banks and leading to massive stock price falls. The US crisis also caused the spectacular bust of Switzerland's storied financial institution Credit Suisse, which was already tottering due to its bad investment bets.

The scare of a repeat of the global financial crisis of 2008, which was triggered after the fall of Lehman Brothers, led the US and European regulators to scurry and take big rescue measures such as extending credit lifelines, standing to insure all deposits at SVB and swift sale of Credit Suisse to UBS.

WHAT LED TO THE CURRENT CRISIS?

The SVB episode, which sparked the current crisis and exposed chinks in the US banking system, was not a typical banking failure like the 2008 crisis, which was due the excesses of lending.

Rather SVB had made fewer loans, which were sound assets. However, with few takers of its loans, the bank was sitting on a pile of deposits, which it invested in long-term securities, mostly bonds that were held to maturity. However, the bank was caught off guard due to the sharp rise in interest rates. To contain inflation, the US Fed raised rates to 4.75% in the last one year from below 1%.