A New Financial Crisis is Here: is the Worst Yet to Come?


15 March 2023 - 10:25

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The bankruptcies of SVB and Signature Bank have raised concerns about the stability of the global financial system. Here is the impact on the economy and the moves of the regulators to contain the crisis.

A New Financial Crisis is Here: is the Worst Yet to Come?

The failures of SVB and Signature Bank could be a warning signal of a new global financial crisis.

Over the past 15 years, the world economy has experienced many financial turmoil, from the crisis of 2008 to the recent Covid-19 pandemic, resulting in significant impacts on global financial markets. This is why the crisis of some banks specialized in the hi-tech sector and cryptocurrencies, such as SVB, Silvergate and Signature, has thrown investors (and regulators) into panic: the situation requires an accurate analysis to understand if the crisis is contained or if there are still problems ahead.

To assess the current situation, it is important to consider various factors, such as stock market performance, the level of debt of the countries, the unemployment rate, inflation and the monetary policy of the banks central. A number of economic indicators can provide an overall picture of the health of the world economy and link to what happened over the past week.

Signs of a possible financial crisis

Before assessing the severity of the financial crisis, it is important to understand the signs that precede a crisis.

The recent Covid-19 pandemic has increased uncertainty about the future of the world economy, and the lockdown measures adopted by many countries have had a significant impact on the global economy. There has also been much discussion about the long-term economic impact of the pandemic, with some forecasts pointing to a possible financial crisis on the way.

The central bank monetary policy is a critical factor that can affect the global economy. Central banks can raise or lower interest rates to stimulate or slow economic growth, as needed. The zero interest rate policy adopted during the pandemic favored economic recovery, but pushed inflation to unsustainable levels. If central banks do not manage monetary policy correctly, imbalances can therefore occur in the economy, putting entire sectors at risk.

The unemployment rate and inflation are two other important factors to consider when trying to spot signs of a financial crisis. When the unemployment rate rises and inflation falls, the economy may be in trouble. Similarly, when inflation is too high, it can lead to a decrease in purchasing power and a consequent decrease in consumer spending.

Another sign of a possible financial crisis is the downturn in stock markets. Stock markets reflect investors’ expectations regarding the growth of companies and the economy in general. When stock markets take a sharp fall, it can be a warning sign that the economy is experiencing difficulties.

SVB will cause the new financial crisis?

The specific cases of SVB and Signature could be among the warning signs of a new global financial crisis. Indeed, the bankruptcies of the two banks have a significant impact on the tech and innovation sector in the United States, very thriving sector that contributed to the recovery of the economy in the post-pandemic period. Many players in the economy have large liquid assets parked in accounts with these institutions and have feared they could not pay salaries and suppliers with blocked accounts.

The authorities were surprised by the rapidity of the failures of these banks and intervened quickly fearing that these cracks could spread to other similar specialized and regional institutions, influential but less robust than giants such as JP Morgan and Citigroup, posing a real danger to the economy.

However, doubts remain about the effectiveness of the interventions and about the underlying problems which could be more serious than you think. They are waiting for the next few days to see if the risk of new crises will decrease or increase.

Potential consequences for the global economy

Analysts are concerned about the possibility that waves of customers could withdraw their deposits from weight banks, causing these institutions to collapse. The collapse of the two banks comes just days before the 15th anniversary of the Federal Reserve bailout of Bear Stearns. This event was a major catalyst for the 2008 financial crisis and led to the need for increased regulation in the financial sector.

Some experts fear that other banks may fail, others are more cautious and point out that the banking system is now diversified and with significant reserves. However, the Fed may be forced to rethink its immediate monetary tightening ambitions. Citigroup analysts interpret the moves by the authorities as a signal of maximum efforts to contain the risks of macroeconomic and financial contagion, and the BTFP (Bank Term Funding Program) could be able to provide liquidity in the event of deposit outflows.

Some analysts suggest that the collapse of SVB and Signature Bank could lead to further regulation and restrictions in the startup and venture investment sector. However, others believe this event is simply a market correction and will have no lasting impact on the tech sector.

In any case, it is clear that the collapse of the two banks has sparked a debate about the safety and reliability of the global financial system and has raised concerns among investors and startups that depend on these financial services.

Original article published on Money.it Italy 2023-03-14 17:47:57. Original title: Una nuova crisi finanziaria è qui: sarà contenuta o il peggio deve ancora arrivare?

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