This past week’s banking collapse has left us with more questions than answers. Wall Street was set on edge by the jarring failure of two American banks and the loss of investor trust in Credit Suisse, which caused dramatic market fluctuations and heightened volatility.
During CNN’s primetime program “Bank Bust: Inside the Collapse of SVB,” experts weighed in on how financial institutions may best make sense of a quickly changing and complicated environment.
Here are the five questions that Wednesday night’s experts addressed.
Are my funds secure?
Despite frightening headlines, former Treasury Secretary Lawrence Summers that now is not the time for consumers to worry.
Summers stated, “I do not believe this is a time for panic or worry.” “This is not 2008 when individuals had to worry about where their money would come from… That is certainly not the case.”
“The money of Americans is secure,” he declared.
Are banks in a position comparable to that of 2008?
This is not a rerun of the global financial catastrophe of 2008, according to top business correspondent Christine Romans, because banks are not holding toxic assets.
“They are no longer permitted to,” Romans stated. “They no longer have all of that crap on their balance sheets.” Companies must reserve more capital, and the largest banks must undergo stress tests.”
Yet, Romans observed that smaller banks such as SVB are not subject to the same level of regulatory scrutiny as their larger competitors.
“The jury is still out on the dispute over whether some of these smaller banks were permitted to opt out of all… restrictions, which may have made them more vulnerable,” Romans added.
These laws enacted in response to the Great Recession imposed harsher limits on the banking industry. Small and mid-sized banks, such as SVB, were excluded from some of the stringent capital requirements imposed on bigger institutions, as well as from the necessity to undertake annual Federal Reserve examinations of their capacity to resist financial crises.
Why was SVB given preferential treatment?
Friday’s failure of Silicon Valley Bank gripped its clients with dread. On Monday, however, they could breathe a sigh of relief, as the Treasury Department, the Federal Reserve, and the Federal Deposit Insurance Corporation announced over the weekend that each client would be paid whole, over and above the $250,000 FDIC insurance limit.
While it was a positive development for account holders, several questioned why the FDIC was willing to bend its regulations for SVB and its clients.
Lynette Khalfani-Cox, CEO of AskTheMoneyCoach.com, stated, “I do believe there is a little bit of moral hazard here,” alluding to the assumption that banks will take on greater risk if they believe they will be bailed out.
Why did the FDIC make the choice it did? Khalfani-Cox stated that the federal government did not want SVB’s failure to “have a domino effect.” “Federal officials categorized them as systemic risk,’ so they were granted an exemption.”
What exactly is a “moral hazard”?
You may hear economists and market experts use the term “moral hazard” while discussing the rescue of two US banks, Silicon Valley Bank and Signature, during the past weekend.
“Moral hazard” is a rather academic abbreviation for the notion that banks (or other corporations) would take on greater risk if they expect to be bailed out in the end.
Others say, for instance, that SVB should have been allowed to fail since the pain of the consequences would have outweighed the disadvantages of consumers losing money and companies failing. Others warn that the danger of allowing the sixteenth-largest bank in the United States to fail, and maybe allowing its IT industry clients to fail as well, could have far-reaching and potentially fatal effects.
What will happen to American mortgage rates in the midst of all chaos?
The market panic makes it more difficult to acquire a property, especially if government authorities such as the Federal Reserve tighten down on banks following SVB’s failure. Most analysts anticipate the Fed’s historic rate-hiking cycle to continue in order to keep inflation in line.
Former JPMorgan trader Vivian Tu believes that, based on what the Federal Reserve has stated, interest rates will continue to climb.
“On top of that, I believe a lot of people are wondering, ‘Hey, if I’m saving for a down payment, is a bank a secure place to keep my money?'”