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![above provide a general framework for understanding the vulnerabilities and risks
that can lead to the collapse of banks during a financial crisis.
2023 banking crisis
Over the course of five days in March 2023, three small- to mid-size U.S. banks
failed, triggering a sharp decline in global bank stock prices and swift response by
regulators to prevent potential global contagion. Silvergate Bank and Signature
Bank, both with significant exposure to cryptocurrency, failed in the midst
of turbulence in that market. Silicon Valley Bank (SVB) failed when a bank run was
triggered after it sold its Treasury bond portfolio at a large loss, causing depositor
concerns about the bank's liquidity. The bonds had lost significant value as market
interest rates rose after the bank had shifted its portfolio to longer-maturity bonds.
The bank's clientele was primarily technology companies and wealthy individuals
holding large deposits, but balances exceeding $250,000 were not insured by
the Federal Deposit Insurance Corporation (FDIC).
In response to the bank failures, the three major U.S. federal bank regulators
announced in a joint communiqué that extraordinary measures would be taken to
ensure that all deposits at Silicon Valley Bank and Signature Bank would be
honored.[1]
The Federal Reserve established a Bank Term Funding Program (BTFP)
to offer loans of up to one year to eligible depository institutions pledging qualifying
assets as collateral.[2][3]
To prevent the situation from affecting more banks, global industry regulators,
including the Federal Reserve, the Bank of Canada, Bank of England, Bank of
Japan, European Central Bank, and Swiss National Bank intervened to provide
extraordinary liquidity.[4][5][6]
Outside of the United States and other central banks,
attempts to calm the banking crisis came most notably from Switzerland, where on
March 19, Credit Suisse was acquired by rival UBS in a government-brokered deal
with an attempt to halt the banking crisis. UBS and the Swiss government were
praised for the deal, seen as a way to prevent Credit Suisse, itself considered
a systemically important financial institution, from collapsing and causing further
crisis within the banking system.[7][8]
By March 16, large interbank flows of funds were occurring to shore up bank
balance sheets and some analysts were talking of a possibly broader U.S. banking
crisis.[9]
The Federal Reserve discount window liquidity facility had experienced
approximately $150 billion in borrowing from various banks by March 16.[10]
Soon after the bank run at SVB, depositors quickly began withdrawing cash from
San Francisco-based First Republic Bank (FRB), which focused on private](https://image.slidesharecdn.com/thieco3-230604090215-f7536026/85/Thi-ECO3-docx-13-320.jpg)
![banking to wealthy clientele. Like SVB, FRB had substantial uninsured deposits
exceeding $250,000; such deposits constituted 68% of the bank's total at year-end
2022, declining to 27% by the end of March, as $100 billion in uninsured deposits
were withdrawn. Despite a $30 billion capital infusion from a group of major banks
in March, FRB continued to destabilize and its stock price plummeted as the FDIC
prepared to take it into receivership and find a buyer on April 29.[7][8]
On May 1,
the FDIC announced that First Republic had been closed and sold to JPMorgan
Chase.[11][12]
United States[edit]
Further information: Cryptocurrency bubble § 2020–2022 cryptocurrency bubble,
and 2021–2023 inflation surge
Normal yield curve began inverting in July 2022, causing short-term Treasury rates
to exceed long-term rates
In the lead-up period, many banks within the United States had invested their
reserves in U.S. Treasury securities, which had been paying low interest rates for
several years. As the Federal Reserve began raising interest rates in 2022 in response
to the 2021–2023 inflation surge, bond prices declined, decreasing the market value
of bank capital reserves, causing some banks to incur unrealized losses; to maintain
liquidity, Silicon Valley Bank sold its bonds to realize steep losses.[9]
Also, several
banks gained market exposure to cryptocurrency and cryptocurrency-related firms
prior to and during the COVID-19 pandemic;[13]
the 2020–2022 cryptocurrency
bubble popped in late 2022.[14]
In this environment, three such banks failed or were
shut down by regulators: The first bank to fail, cryptocurrency-focused Silvergate
Bank, announced it would wind down on March 8, 2023 due to losses suffered in its
loan portfolio.[15][16]
Two days later, upon announcement of an attempt to raise
capital, a bank run occurred at Silicon Valley Bank, causing it to collapse and be
seized by regulators that day.[15]
Signature Bank, a bank that frequently did business
with cryptocurrency firms, was closed by regulators two days later on March 12,
with regulators citing systemic risks.[15][17][18]
The collapses of First Republic Bank,
Silicon Valley Bank and Signature Bank were the second-, third- and fourth-largest
bank failures in the history of the United States, respectively, smaller only than the
collapse of Washington Mutual during the 2007–2008 financial crisis.[19][failed
verification]](https://image.slidesharecdn.com/thieco3-230604090215-f7536026/85/Thi-ECO3-docx-14-320.jpg)
![In 2019, the Federal Reserve's "Tailoring rules" changed, increasing minimum asset
threshold from $50 billion to $100 billion and reduced the number of required stress
testing scenarios, allowing banks with under $100 billion to have reduced liquidity
standards.[20]
Signature Bank and First Republic Bank were under the $100 billion
total assets for the Federal Reserve's tailoring rules, allowing the banks to have
reduced regulation for liquidity.[21][22][23]
Some have questioned if First Republic
Bank would had a bank run if there were similar regulation to EU countries in the
United States.[24]
Liquidation of Silvergate Bank[edit]
Further information: Silvergate Bank § Liquidation
Background[edit]
Silvergate Bank is a California-based bank that began operations in 1988 as
a savings and loan association. In the 2010s, the bank began to provide banking
services to players within the cryptocurrency market. The bank sought regulatory
approval in the summer of 2014 to do business with cryptocurrency firms. The bank
expanded the assets on its balance sheet significantly—doubling its assets in its 2017
fiscal year to $1.9 billion—by servicing cryptocurrency exchanges and other
companies who were involved in the cryptocurrency business that could not secure
financing from larger, more conservative banks. Despite its rapid growth, the
company maintained a small physical footprint; in 2018, the bank had only three
branches, all located in Southern California.[25]
By the fourth quarter of 2022, 90%
of the bank's deposits had become cryptocurrency-related, with over $1 billion in
deposits being tied to Sam Bankman-Fried.[26]
In addition to providing traditional banking services to its cryptocurrency clients, the
bank operated as a clearinghouse for its banking clients; it involved itself in the
business of resolving and settling transactions in real-time through its proprietary
Silvergate Exchange Network. The network allowed a client to send payments in
U.S. dollars from its accounts with Silvergate to those of another client of the bank
without requiring an interbank wire transfer. A large number of cryptocurrency
companies set up accounts with the bank to take advantage of Silvergate's relatively
quick transaction settling times.[25]
Silvergate stock price (2019–2023)
Despite conducting the majority of its business with cryptocurrency companies,
Silvergate's investment portfolio was fairly conservative; the company took large
positions in mortgage-backed securities as well as U.S. bonds.[27]
These sorts of](https://image.slidesharecdn.com/thieco3-230604090215-f7536026/85/Thi-ECO3-docx-15-320.jpg)
![assets, while reliable to be paid-in-full through their maturity date, carry risks
associated with changes in interest rates; there is an inverse relationship between
the mark-to-market value of a bond and the bond's yield. As interest rates shot up
during the 2021–2023 inflation surge, the mark-to-market price of these securities
decreased significantly. When these losses are unrealized, this does not typically
cause the bank to cease operating, as the bank will receive payment-in-full under the
original terms of the bond. However, if forced to sell these securities at a lower mark-
to-market price, the losses on these types of assets become realized, posing
significant risks to the bank's ability to continue to operate.[27]
Events[edit]
Silvergate was hit with a bank run in the wake of the bankruptcy of FTX; deposits
from cryptocurrency-related firms dropped by 68% at the bank, with the bank facing
requests from its clients to withdraw upwards of $8 billion in deposits.[26]
As
Silvergate did not have enough cash-on-hand to satisfy the deposit withdrawals, the
bank began to sell its assets at a steep loss; the company realized a loss of $718
million on withdrawal-related asset sales in the fourth fiscal quarter of 2022
alone.[26][27][28]
The bank, in a public statement, said that it was solvent at the end of
Q4 2022, with an asset sheet containing assets of $4.6 billion in cash and $5.6 billion
in liquid debt securities, with $3.8 billion in deposit obligations.[26]
Silvergate faced
tight financial constraints in the coming months, selling assets at a loss and
borrowing $3.6 billion from the Federal Home Loan Bank of San Francisco to
maintain its liquidity.[29]
Silvergate wrote in a regulatory filing on March 1 that the
bank risked losing its status as a well-capitalized bank and that the bank faced risks
relating to its ability to continue operating.[16][30]
Facing continued losses from sales of securities at mark-to-market price, Silvergate
released a public notice on March 8, 2023, saying that it would undergo voluntary
liquidation and would return all deposited funds to their respective owners.[16][18][27]
Collapse of Silicon Valley Bank[edit]
Main article: Collapse of Silicon Valley Bank
Background[edit]
Silicon Valley Bank (SVB) was a commercial bank founded in 1983 and
headquartered in Santa Clara, California. Until its collapse, SVB was the 16th largest
bank in the United States and was heavily skewed toward serving companies and
individuals from the technology industry.[31][32][33]
Nearly half of U.S. venture
capital-backed healthcare and technology companies were financed by
SVB.[34]
Companies such as Airbnb, Cisco, Fitbit, Pinterest, and Block, Inc. have](https://image.slidesharecdn.com/thieco3-230604090215-f7536026/85/Thi-ECO3-docx-16-320.jpg)
![been clients of the bank.[35]
In addition to financing venture-backed companies, SVB
was well known as a source of private banking, personal credit lines, and mortgages
to tech entrepreneurs.[36]
According to the FDIC, it had $209 billion in assets at the
end of 2022.[37]
Silicon Valley Bank recorded an increase of its deposit holdings during the COVID-
19 pandemic, when the tech sector experienced a period of growth. In 2021, it
purchased long-term Treasury bonds to capitalize on the increased deposits.
However, the current market value of these bonds decreased as the Federal
Reserve raised interest rates to curb the 2021–2023 inflation surge.[38]
Higher
interest rates also raised borrowing costs throughout the economy and some Silicon
Valley Bank clients started pulling money out to meet their liquidity needs.[39]
Events[edit]
To raise cash to pay withdrawals by its depositors, SVB announced on March 8 that
it had sold over US$21 billion worth of securities, borrowed US$15 billion, and
would hold an emergency sale of some of its treasury stock to raise US$2.25 billion.
The announcement, coupled with warnings from prominent Silicon Valley investors,
caused a bank run as customers withdrew funds totaling US$42 billion by the
following day.[39]
On March 10, 2023, as a result of the bank run, the California Department of
Financial Protection and Innovation (DFPI) seized SVB and placed it under the
receivership of the FDIC. The FDIC established a deposit insurance national bank,
the Deposit Insurance National Bank of Santa Clara, to service insured deposits and
announced that it would start paying dividends for uninsured deposits the following
week; the dividends were funded by proceeds from the sale of SVB assets. Some 89
percent of the bank's US$172 billion in deposit liabilities exceeded the maximum
insured by the FDIC.[40][41]
Two days after the failure, the FDIC received exceptional
authority from the Treasury and announced jointly with other agencies that all
depositors would have full access to their funds the next morning.[42][43]
An initial
auction of Silicon Valley Bank assets on the same day attracted a single
bid,[44]
after PNC Financial Services and RBC Bank backed away from making
offers.[45][46]
The FDIC rejected this offer and plans to hold a second auction to attract
bids from major banks, now that the bank's systemic risk designation allows the
FDIC to insure all deposits.[44]
The bank was later reopened as a newly
organized bridge bank, Silicon Valley Bridge Bank, N. A.[47]
On March 26, 2023, the FDIC announced that First Citizens BancShares would
acquire the commercial banking business of SVB.[48][49]
As part of the deal, First
Citizens brought around $56.5 billion in deposits and $72 billion of SVB's loans
discounted by $16.5 billion, while around $90 billion of SVB's securities continue](https://image.slidesharecdn.com/thieco3-230604090215-f7536026/85/Thi-ECO3-docx-17-320.jpg)
![to remain in receivership.[50]
The FDIC received about $500 million-worth of equity
appreciation rights linked to First Citizens' shares.[51]
SVB's 17 branches reopened
under the First Citizens brand the next day, with all SVB depositors becoming
depositors of First Citizens. SVB Private was initially going to be auctioned
separately but First Citizens later acquired the business as well.[52]
Collapse of Signature Bank[edit]
Further information: Signature Bank § Collapse
Background[edit]
Signature Bank stock price (2006–2023)
Signature Bank was a New York City-based bank founded in 2001.[53]
The bank
began as a subsidiary of Bank Hapoalim that took on clients with assets of around
$250,000, lending to small businesses based in New York City and in
the surrounding metropolitan area.[54]
The bank provided financing within
the multifamily residential rental housing market in the New York metropolitan area
beginning in 2007,[55][56]
though it began to reduce its exposure to the market during
the 2010s.[57]
By 2019, just over four-tenths of the value of the bank's loans were
made to multifamily homeowners in the New York metropolitan area, comprising
$15.8 billion of the bank's then-$38.9 billion in net loans.[57][58]
Beginning in 2018, Signature Bank began to court customers in the cryptocurrency
industry, securing hires that were experienced in the area with the goal of moving
away from its dependence on real estate lending.[59]
The quantity of deposits held at
the bank expanded significantly, with deposits increasing from about $36.3 billion
at the end of the 2018 fiscal year to $104 billion by August 2022; that month, over
one-quarter of the bank's deposits held were those of cryptocurrency
companies.[58][59]
Its cryptocurrency-sector clients included large cryptocurrency
exchange operators, such as Celsius Network and Binance.[18][59]
By early 2023,
Signature Bank had become the second largest provider of banking services to the
cryptocurrency industry—second only to Silvergate Bank.[60]
In addition to providing traditional banking services to cryptocurrency clients,
Signature Bank opened a proprietary payment network for use among its
cryptocurrency clients. The payment network, Signet, had opened in 2019 for
approved clients, and allowed the real-time gross settlement of fund transfers
through the blockchain without third parties or transaction fees. By the conclusion
of 2020, Signature Bank had 740 clients using Signet.[61][62]
The network continued](https://image.slidesharecdn.com/thieco3-230604090215-f7536026/85/Thi-ECO3-docx-18-320.jpg)
![to expand during the following years; both Coinbase and the TrueUSD dollar-
pegged stablecoin had become integrated with Signet in 2022 and 2021,
respectively.[63]
Events[edit]
Reporters ask questions to Signature Bank customers exiting a New York location.
As cryptocurrency prices dropped significantly in 2022, particularly so after the
collapse of cryptocurrency exchange FTX, depositors in Signature Bank began to
withdraw deposits in the tune of billions of dollars; by the end of 2022, deposits in
the bank totaled around $88.6 billion, down from $106.1 billion in deposits held at
the beginning of the year—a time when over one-quarter of deposits were held by
digital asset-related entities.[18][58]
Towards the end of 2022, Signature Bank cut
business ties with cryptocurrency exchange Binance, seeking to reduce the bank's
exposure to risk associated with the cryptocurrency market.[18]
According to
Signature Bank board member Barney Frank, Signature Bank was hit with a multi-
billion dollar bank run on Friday, March 10, with depositors expressing concern
about cryptocurrency-related risks affecting the bank.[18]
Investor confidence in the
bank was also badly shaken, and the bank's stock declined by 23% on that Friday—
the day on which Silicon Valley bank collapsed—marking the then-largest single-
day decline of the Signature Bank's value in its 22-year history.[64]
On March 12, 2023, two days after the collapse of Silicon Valley Bank, Signature
Bank was closed by regulators from the New York State Department of Financial
Services in what is the third-biggest banking collapse in U.S. history.[15][18]
The bank
proved unable to close a sale or otherwise bolster its finances before markets opened
on Monday morning in order to protect its assets after customers began withdrawing
their deposits in favor of bigger institutions,[18]
and shareholders of the bank lost all
invested funds.[65]
The bank was placed under receivership by the FDIC, which
immediately established Signature Bridge Bank, N.A. to operate its marketed assets
to bidders.[66]
Signature Bank had been under multiple federal investigations that were ongoing at
the time of the bank's collapse regarding the rigor of its anti-money
laundering measures. The U.S. Department of Justice had opened a criminal probe](https://image.slidesharecdn.com/thieco3-230604090215-f7536026/85/Thi-ECO3-docx-19-320.jpg)
![into whether the firm was performing due diligence when opening up new accounts
and whether it was doing enough to detect and report potential criminal activity by
its clients. The U.S. Securities and Exchange Commission had opened a separate,
related civil probe.[67][68]
On March 19, the New York Community Bank (NYCB) agreed to purchase around
$38.4 billion in Signature's assets for $2.7 billion. Due to the deal, 40 Signature
branches were rebranded to Flagstar Bank, one of NYCB's subsidiaries.[69]
Collapse of First Republic Bank[edit]
Further information: First Republic Bank § Collapse
First Republic Bank Stock Price
Background[edit]
This section needs expansion with: a summary with a level
of detail about the general operations and history equivalent
to the other banks. You can help by adding to it. (May 2023)
The San Francisco-based First Republic Bank (FRB) was a commercial bank and
provider of wealth management services. It catered to high-net-worth
individuals and operated 93 offices in 11 states, primarily in New York, California,
Massachusetts, and Florida.[22]
It was the 14th largest U.S. bank at the end of
2022.[70]
Events[edit]
Intense scrutiny and pressure were applied to other U.S. banks, including
FRB.[71]
On March 13, its shares fell by 62%.[72]
As the bank faced significant
liquidity issues, on March 16, it received a $30 billion lifeline in the form of deposits
from a number of major U.S. banks, on top of a $70 billion financing facility
provided by JPMorgan Chase & Co.[73][74]
Eleven of the largest U.S. banks
participated in the rescue effort,[75]
under the direction of Jamie Dimon.[76]
On March 19, S&P Global downgraded the credit rating of First Republic Bank
further into junk by three notches saying that the private-sector rescue effort "may
not solve the substantial business, liquidity, funding, and profitability challenges that
we believe the bank is now likely facing."[77]
In its quarterly report in April, the bank
said that deposits had plunged by more than $100 billion. The announcement caused
the bank's share price to fall by more than 20%.[78]](https://image.slidesharecdn.com/thieco3-230604090215-f7536026/85/Thi-ECO3-docx-20-320.jpg)
![On April 28, the bank announced plans to begin selling its bonds and securities at a
loss to raise equity and also begin laying off people.[79]
Multiple advisor teams began
to leave the bank as well.[80]
On that day, it was announced that the FDIC was
considering seizing the bank, causing its stock price to plunge another 43% to
$3.50.[79][81]
After falling another 42% in after hours trading, the FDIC confirmed its
imminent takeover of the bank.[82][83]
In 2023, the cumulative decrease in stock price
was 97%.[84]
The next day, the FDIC approached various banks, including JPMorgan
Chase, PNC and Bank of America, saying they had until April 30 to place bids for
First Republic Bank.[85]
On the morning of May 1, the California Department of Financial Protection and
Innovation announced that FRB had been closed, and its assets were sold to
JPMorgan for $10.6 billion.[86]
Federal response[edit]
Bank Term Funding Program[edit]
In response to the bank failures of March, the government took extraordinary
measures to mitigate fallout across the banking sector.[18]
On March 12, Federal
Reserve created the Bank Term Funding Program (BTFP), an emergency lending
program providing loans of up to one year in length to banks, savings
associations, credit unions, and other eligible depository institutions that
pledge U.S. Treasuries, agency debt and mortgage-backed securities, and other
qualifying assets as collateral.[2][3][87]
The program is designed to provide liquidity to
financial institutions, following the collapse of Silicon Valley Bank and other bank
failures, and to reduce the risks associated with current unrealized losses in the U.S.
banking system that totaled over $600 billion at the time of the program's
launch.[88]
Funded through the Deposit Insurance Fund,[89]
the program offers loans
of up to one year to eligible borrowers who pledge as collateral certain types
of securities including U.S. Treasuries, agency debt, and mortgage-backed
securities.[90]
The collateral will be valued at par instead of open-market value, so a
bank can borrow on asset values that have not been impaired by a series of interest
rate hikes since 2022. The Federal Reserve also eased conditions at its discount
window. The Department of the Treasury will make available up to $25 billion from
its Exchange Stabilization Fund as a backstop for the program.[91]
In addition to working with their counterparts at the FDIC and U.S. Treasury to
provide liquidity to banks through the BTFP, the Federal Reserve has begun to
internally discuss implementing stricter capital reserve and liquidity requirements
for banks with between $100 billion and $250 billion in assets on their balance
sheets.[92]
A review of regulations affecting regional banks has been ongoing since
2022, as Federal Reserve vice chairman Michael Barr and other officials in](https://image.slidesharecdn.com/thieco3-230604090215-f7536026/85/Thi-ECO3-docx-21-320.jpg)
![the Biden Administration had become increasingly concerned about the risk posed
to the financial system by the rapidly increasing size of regional banks.[92][93]
U.S. investigations[edit]
The collapse of Silicon Valley Bank itself has also spurred federal investigations
from the U.S. Securities and Exchange Commission as well as the United States
Department of Justice. Within the scope of both probes is the sales of stock made by
senior officers of Silicon Valley Bank shortly before the bank failed, while the SEC's
investigation also includes a review of past financial- and other risk-related
disclosures made by Silicon Valley Bank to evaluate their accuracy and
completeness.[94]
Aftermath of bank failures[edit]
As depositors began to move money en masse from smaller banks to larger
banks,[18][71]
on Monday, March 13, shares of regional banks fell.[72]
Bitcoin price
Following SVB and Signature's collapses, Western Alliance Bancorporation share
price fell 47% and PacWest Bancorp was down 21% recovering after their trading
was halted.[95][96]
Moody's downgraded its outlook on the U.S. banking system to
negative, citing what it described as "rapid deterioration" of the sector's financial
footing.[97]
It also downgraded the credit ratings of several regional banks, including
Western Alliance, First Republic, Intrust Bank, Comerica, UMB Financial
Corporation, and Zions Bancorporation.[98]
Large declines in regional bank stocks
continued after First Republic's failure.[99]
U.S. President Joe Biden made a statement about the first three bank failures on
March 13, and asserted that government intervention was not a bailout and that the
banking system was stable.[100][101]
The initial bank failures led to speculation on 13 March that the Federal Reserve
could pause or halt rate hikes.[102]
Beginning on March 13, traders began modifying
their strategies in the expectation that fewer hikes than previously expected will
occur.[103]
Some financial experts suggested that the BTFP, combined with a recent
practice of finding buyers who would cover all deposits, may have effectively
removed the FDIC's $250,000 deposit insurance limit.[104]
However, Treasury
Secretary Janet Yellen clarified that any guarantee beyond that limit would need the
approval of the Biden administration and Federal regulators.[105]
The initial three bank failures and resulting pressures on other U.S. regional banks
were expected to reduce available financing in the commercial real estate market
and further slow commercial property development.[106]
The Federal Reserve's](https://image.slidesharecdn.com/thieco3-230604090215-f7536026/85/Thi-ECO3-docx-22-320.jpg)
![discount window liquidity facility saw around $150 billion in borrowing from
various banks by March 16,[10]
more than 12 times the $12 billion that the BTFP
provided.[107]
Since the majority of First Republic's long term assets were
in municipal bonds, it was unable to make full use of the BTFP as those assets did
not qualify as an eligible collateral.[108]
By 16 March, large inter-bank flows of funds were occurring to shore up bank
balance sheets and numerous analysts were reporting on a more general
U.S. banking crisis. Many banks had invested their reserves in U.S. Treasury
securities, which had been paying low interest rates. As the Federal Reserve began
raising rates in 2022, bond prices declined decreasing the market value of bank
capital reserves, leading some banks to sell the bonds at steep losses as yields on
new bonds were much higher.[9]
The Federal Reserve's discount window liquidity
facility had experienced approximately $150 billion in borrowing from various
banks by March 16.[10]
On 17 March, President Biden stated that the banking crisis had calmed
down,[109]
while the New York Times said that the March banking crisis was hanging
over the economy and had rekindled fear of recession as business borrowing would
become more difficult as many regional and community banks would have to reduce
lending.[110][111]
Late on Sunday, the Federal Reserve and several other central banks announced
significant USD liquidity measures in order to calm market turmoil.[112]
In a
"coordinated action to enhance the provision of liquidity through the standing U.S.
dollar swap line arrangements", the U.S. Federal Reserve, the Bank of Canada, Bank
of Japan, European Central Bank, and Swiss National Bank joined together to
organize daily U.S. dollar swap operations. These swaps had previously been set up
to occur on a weekly cadence.[113]
The share price of PacWest had fallen sharply on 3 May after the bank announced
that it was 'considering strategic options including a sale'. On 4 May share trading
was suspended as the sell-off marked a further 42% loss with other US regional
banks, including First Horizon, Metropolitan Bank and Western Alliance, also being
affected.[114][115]
In May 2023, FDIC proposed imposing higher fees on an estimated 113 of the largest
banks to cover the costs of bailing out uninsured depositors.[116]
International impact[edit]
By Sunday, 19 March, concerns about the banking sector internationally had
increased.[4][5][6][117][118]
That day, Swiss bank UBS Group AG bought its smaller
competitor Credit Suisse in an emergency arrangement brokered by the Swiss](https://image.slidesharecdn.com/thieco3-230604090215-f7536026/85/Thi-ECO3-docx-23-320.jpg)
![government. One month before the events in the United States, Credit Suisse
announced its largest annual loss since the 2008 financial crisis, as clients continued
withdrawing their cash at a rapid pace; $147 billion had been withdrawn in the fourth
quarter of 2022. It also disclosed it had found "material weaknesses" in its financial
reporting. Its largest investor, Saudi National Bank, announced on March 15 that it
would not provide more support to Credit Suisse. Its share price plunged 25% on the
news and UBS stepped in to buy the bank. Axel Lehmann, former chairman of the
bank, later sought to blame the American bank failures for triggering Credit Suisse's
demise, though other analysts disputed that characterization. The bank had
experienced many years of multi-billion dollar losses, scandals, executive turnover
and weak business strategy.[119]
Late on Sunday the Federal Reserve and several other central banks announced
significant USD liquidity measures in order to calm market turmoil.[117]
In a
"coordinated action to enhance the provision of liquidity through the standing U.S.
dollar swap line arrangements", the U.S. Federal Reserve, the Bank of Canada, Bank
of Japan, European Central Bank (ECB) and Swiss National Bank joined together to
organize daily U.S. dollar swap operations. These swaps had previously been set up
to occur on a weekly cadence.[113]
On 21 March, The Business Times reported that Asian central banks were "unlikely
to be greatly influenced by the banking crisis in the United States and
Europe",[120]
but Australia's central bank governors met and publicly indicated a
potential pause in recent rate hikes. ABC News reported that the challenge for central
banks is determining if the "banking turmoil close to crashing the real economy, or
is inflation still the greater threat."[121]
In Japan the three main lenders, Mitsubishi
UFJ Financial Group, Sumitomo Mitsui Financial Group and Mizuho Financial
Group, lost share value between 10% and 12% due to the market turmoil and their
exposure to the bond market.[122]
Japan's central bank held a crisis meeting in mid-
March while the Topix banks index fell 17%. The fall was led by fears over the SVB
collapse and the risks in Japan's regional banking sector, partly because of exposure
to US interest rate hikes.[123]
The cost to insure against default on Deutsche Bank debt rose substantially on
Friday, 24 March, with the 5-year CDS for the bank's debt rising 70%.[124]
The ECB
and other European central banks raised interest rates the same day.[125]
The
European STOXX 600 index fell around 4% with shares in Deutsche Bank down
more than 14% at one point, closing the day at a loss of around 8%.[126]
The UK's
banking index also fell around 3% led by falls of around 6% for
both Barclays and Standard Chartered and a 4% drop for NatWest. Shares in other
European banks also fell, among them Commerzbank, Austria's Raiffeisen
Bank and the French Société Générale.[127][128][129]
According to the European](https://image.slidesharecdn.com/thieco3-230604090215-f7536026/85/Thi-ECO3-docx-24-320.jpg)
![Commission's Paolo Gentiloni, finance ministers in the Euro zone called on the
Commission to close loopholes in Crisis Management and Deposit Insurance
(CMDI) provision, starting in the second quarter of 2023.[130]
Chinese banks experienced little negative effect. According to Bloomberg News,
almost all of the 166 top performers during the market turmoil were in China. The
banking crisis in the U.S. and Europe highlighted the relative stability of the Chinese
banking system. While China's recovery from the pandemic remains fragile,
inflation there is muted, and the People's Bank of China had adjusted interest rates
at a slower pace than Western central banks.[131]
The turbulence in the financial system caused India's central bank to put any further
hikes in interest rate on hold on 6 April, with governor Shaktikanta Das saying "it's
a pause not a pivot". A 25 basis point increase had been widely expected. Central
banks in Australia, Canada and Indonesia also paused any further increases.[132]
While rising interest rates give banks greater returns on customer's loans, the tighter
financial conditions meant the sector saw a downturn in equity funding, with the
S&P 500 bank index (SPXBK) in April down 14% year to date on expectation of
lower quarterly earnings for some US banks.[133]
On 11 April the International
Monetary Fund downgraded its forecast for GDP growth globally in 2023 from 2.9%
to 2.8%, saying "Uncertainty is high and the balance of risks has shifted firmly to
the downside so long as the financial sector remains unsettled". The forecast marked
a slowdown from 3.4% in 2022, but predicted growth could rise modestly to 3.0%
in 2024.[134]
The IMF had been cutting its forecast since spring 2022.[135][136]
Bank crisis:
The banking crisis described in your statement has significant implications for the US, global, and
Vietnam economies. Let's examine the effects on each and discuss potential actions the Federal
Reserve (Fed) and government could take.
1. Effects on the US Economy:
a. Financial Stability: The bank failures and subsequent turmoil led to a decline in bank stock
prices, increased borrowing from the Federal Reserve discount window, and concerns about the
stability of the banking system. This instability can affect consumer and investor confidence,
potentially leading to reduced lending, investment, and economic activity.
b. Credit Availability: The crisis may result in a reduction in available financing, particularly in
the commercial real estate market. Regional and community banks, facing pressures and potential
losses, may be compelled to reduce lending, impacting businesses and individuals reliant on
credit.
c. Regulatory Response: The government and regulatory bodies, including the Fed and FDIC,
responded by implementing measures to restore confidence and stability. The Bank Term
Funding Program (BTFP) was established to provide emergency loans to eligible depository](https://image.slidesharecdn.com/thieco3-230604090215-f7536026/85/Thi-ECO3-docx-25-320.jpg)
Thi ECO3.docx
- 1. I. Mirco economy: Câu1: Về Fitness industry The fitness industry often reduces prices and offers discounts on fitness equipment, video workouts, and gym memberships after the first of the year to capitalize on the high demand generated by people's New Year's resolutions to get in shape and lose weight. There are a few reasons why this happens: In economics, the concept of elasticity is used to measure the responsiveness of quantity demanded or supplied to changes in price or other relevant factors. Applying elasticity theory to the scenario of fitness businesses reducing prices after the New Year, we can examine how the demand for fitness equipment, video workouts, and gym memberships behaves. Price Elasticity of Demand: The price elasticity of demand measures the sensitivity of the quantity demanded to changes in price. In the context of fitness products and services, if the demand is elastic, a decrease in price will lead to a proportionately larger increase in quantity demanded. By reducing prices, fitness businesses can attract more customers and generate additional sales, even if profit margins per unit are lower. The elasticity of demand for fitness products and services during the New Year period plays a significant role in determining the extent of price reductions. Cross-Price Elasticity: Cross-price elasticity measures the responsiveness of the quantity demanded for one good to changes in the price of another related good. In this case, it would reflect how the demand for fitness equipment, video workouts, or gym memberships changes when the prices of these items are altered. Fitness businesses may strategically reduce the prices of gym memberships or video workouts to increase their attractiveness relative to other options like home fitness equipment. The cross-price elasticity between these different fitness offerings can influence the extent to which businesses adjust their prices. Income Elasticity: Income elasticity measures how changes in consumers' income affect the quantity demanded for a particular good or service. While it may not directly apply to the scenario of post-New Year price reductions, it is worth noting that some individuals might have higher disposable income at the beginning of the year due to holiday bonuses or financial resolutions. This increased income can make them more willing to spend on fitness products or services, further contributing to the demand for discounted offerings.
- 2. Time Elasticity: Timeelasticity refers to the responsiveness of quantity demanded or supplied to changes in time. In this context, it relates to the seasonal nature of the fitness industry. Fitness businesses understand that people's interest in health and fitness tends to be higher at the beginning of the year due to New Year's resolutions. By reducing prices during this time, they aim to take advantage of the time sensitivity of demand and encourage individuals to make purchases while their motivation is high. By considering these different elasticities, fitness businesses can strategically determine the level of price reductions that will yield the desired increase in quantity demanded and overall profitability. They need to assess the responsiveness of demand to price changes, the competitive landscape, and the market dynamics to make informed pricing decisions and effectively capitalize on the increased demand after the New Year. Câu 2: In an article about the financial problems of USA Today, Newsweek reported that the paper was losing about $20 million a year. A Wall Street analyst said that the paper should raise its price from 50 cents to 75 cents, which he estimated would bring in an additional $65 million a year. The paper's publisher rejected the idea, saying that circulation could drop sharply after a price increase, citing The Wall Street Journal's experience after it increased its price to 75 cents. What implicit assumptions are the publisher and the analyst making about price elasticity? The implicit assumptions about price elasticity made by the publisher and the analyst in this scenario are as follows: 1. Publisher's Implicit Assumption: The publisher assumes that the price increase from 50 cents to 75 cents would result in a sharp drop in circulation. This assumption suggests that the publisher believes the demand for USA Today is highly elastic, meaning that a relatively small increase in price would lead to a proportionally larger decrease in quantity demanded. In other words, the publisher expects that readers are very sensitive to price changes and would significantly reduce their purchases if the price were raised. 2. Analyst's Implicit Assumption: The analyst assumes that the price increase from 50 cents to 75 cents would result in an additional $65 million in revenue per year. This assumption suggests that the analyst
- 3. believes the demandfor USA Today is relatively inelastic, meaning that a price increase would have a smaller impact on the quantity demanded. The analyst expects that readers are less sensitive to price changes and would continue to purchase the newspaper even at the higher price. Both assumptions are based on differing beliefs about the price elasticity of demand for USA Today. The publisher assumes high price elasticity, while the analyst assumes low price elasticity. These assumptions drive their opposing views on the potential impact of a price increase on circulation and revenue. Câu 3: 1. Rapel Valley in Chile is renowned for its ability to produce high- quality wine at a fraction of the cost of many other vineyards around the world. Rapel Valley produces over 20 million bottles of wine annually, of which 5 million are exported to the United States. Strong La Niña weather patterns have caused unusually cold temperatures, devastating many of the wine producers in that region of Chile. How will La Niña affect the price of Chilean wine? Assuming La Niña does not impact the California wine-producing region, how will La Niña impact the market for Californian wine. La Niña weather patterns causing unusually cold temperatures in the Rapel Valley of Chile can have several effects on the price of Chilean wine: 1. Reduced Supply: The cold temperatures may lead to damage and loss of grape crops in the Rapel Valley. This reduction in the grape harvest can result in a decreased supply of Chilean wine, as fewer grapes are available for production. With lower supply, the price of Chilean wine is likely to increase due to the scarcity of the product. 2. Increased Production Costs: The adverse weather conditions may necessitate additional measures and resources to protect the vineyards, such as heaters, coverings, or other methods to mitigate the cold. These additional costs can raise the production expenses for winemakers, potentially leading to higher prices for Chilean wine.
- 4. 3. Shift inExport Patterns: With the reduced supply of Chilean wine, particularly in the Rapel Valley, there may be a shift in export patterns. Winemakers in Chile might prioritize fulfilling domestic demand or redirect exports to other markets where there is less competition or higher profitability. This shift can impact the availability and price of Chilean wine in the United States and other export destinations. Regarding the impact of La Niña on the market for Californian wine, assuming the California wine-producing region is not significantly affected, several dynamics may come into play: 1. Competitive Advantage: If Chilean wine prices increase due to the impact of La Niña, Californian wines may become relatively more competitive in terms of pricing. The higher price of Chilean wine can create an opportunity for California wines to capture market share or increase sales, especially if their prices remain stable. 2. Shift in Consumer Preferences: Consumers who typically purchase Chilean wine may explore alternative options due to the higher prices caused by the impact of La Niña. This could lead to a potential increase in demand for Californian wines as consumers seek comparable alternatives from different regions. 3. Supply and Demand Dynamics: If Chilean wine supply decreases due to the effects of La Niña, and assuming demand for wine remains relatively stable, it could create a gap in the market that Californian winemakers might be able to fill. The relatively stable supply of Californian wine, combined with the potential increase in demand, can influence the market dynamics and potentially lead to increased prices or sales for Californian wine. It's important to note that these are potential scenarios based on the given assumptions. The actual impact of La Niña on the prices and market dynamics of Chilean and Californian wines can be influenced by various other factors, including consumer preferences, production capacity, global
- 5. market conditions, andthe overall supply-demand dynamics in the wine industry. Câu 4: The CEO of a major automaker overheard one of its division managers make the following statement regarding the firm's production plans: "In order to maximize profits, it is essential that we operate at the minimum point of our average total cost curve." If you were the CEO of the automaker, would you praise or chastise the manager? Explain. As the CEO of the automaker, I would chastise the manager for making the statement that operating at the minimum point of the average total cost (ATC) curve is essential to maximize profits. While it may seem logical to assume that operating at the minimum ATC would maximize profits, this assumption is flawed. The statement disregards the fundamental concept of profit maximization, which is based on marginal analysis rather than average cost analysis. To maximize profits, a firm should produce at the quantity where marginal cost (MC) equals marginal revenue (MR). This occurs where the marginal cost curve intersects the marginal revenue curve. Operating at the minimum point of the ATC curve means producing at a level where average costs are minimized, but it does not guarantee that the firm is maximizing its profits. Profit maximization requires considering the relationship between costs, revenues, and output on the margin. If the manager's focus is solely on minimizing average costs, they may overlook the fact that producing at the minimum ATC could result in an output level that is not aligned with market demand. The firm could be producing either too much or too little, which could lead to missed profit opportunities. As the CEO, I would emphasize the importance of considering marginal analysis and the need to align production with market demand. I would encourage the manager to understand the concept of marginal cost and marginal revenue and to make production decisions based on the optimal balance between costs and revenues on the margin, rather than solely relying on average cost considerations.
- 6. Câu 5: WhenMcDonald's Corp. reduced the price of its Big Mac by 75 percent if customers also purchased french fries and a soft drink, The Wall Street Journal reported that the company was hoping the novel promotion would revive its U.S. sales growth. It didn't. Within two weeks sales had fallen. Using your knowledge of game theory, what do you think disrupted McDonald's plans? Based on the information provided, it appears that McDonald's attempted to use a promotional strategy to boost its sales by offering a discounted price for the Big Mac when customers also purchased french fries and a soft drink. However, the sales fell within two weeks, suggesting that the strategy did not achieve the desired outcome. To analyze this situation from a game theory perspective, we can consider the potential factors that may have disrupted McDonald's plans: 1. Substitution Effect: Customers may have substituted their regular purchases of individual items (Big Mac, fries, soft drink) with the discounted bundle offer. This could have resulted in a lower overall revenue for McDonald's if the discounted bundle price was not sufficient to compensate for the reduction in individual item sales. 2. Complementary Goods: Despite the discount, customers may not have found sufficient value in purchasing the bundle of Big Mac, fries, and a soft drink together. They may have preferred to choose their desired items individually, or the specific combination of products may not have been appealing to a significant portion of McDonald's customer base. 3. Consumer Perception: The promotion may have been perceived as a temporary or desperate measure, leading customers to question the quality or value of the products. If customers did not perceive the discounted bundle as a genuine value proposition, they may have been hesitant to participate, resulting in lower sales. 4. Price-Quality Relationship: Customers may associate price reductions with a decrease in quality. The significant price reduction on the Big Mac as part of the bundle offer could have signaled to some
- 7. customers that therewas a reduction in quality or value, which might have deterred them from making a purchase. 5. Market Competition: McDonald's competitors may have responded to the promotion by adjusting their own prices or launching counter- promotions. If competitors offered better deals or more attractive alternatives, customers might have shifted their preferences away from McDonald's, leading to a decline in sales. It's important to note that without further details or data, it's challenging to determine the exact factors that disrupted McDonald's plans. However, considering these possible game theory dynamics can provide some insights into why the promotion did not revive sales growth as expected. Câu 6: Case HoneyBee Farm In a competitive market, prices are determined by the forces of supply and demand. If the market price for honey is below the cost of production, honey farmers may struggle to make a profit. In this case, the government may intervene by implementing a support price, which is a minimum price at which the government agrees to purchase honey from farmers. While support prices can provide a short-term solution to low market prices, they can also have unintended consequences in the long run. If support prices are set higher than the market price, it can lead to an oversupply of honey and a surplus of inventory. This can result in a buildup of unsold honey, which can lead to a drop in market prices, as the surplus honey floods the market. Furthermore, higher support prices can also lead to an increase in production, as more farmers may be incentivized to enter the market due to the guaranteed minimum price. This can exacerbate the oversupply issue and lead to further price drops. In the long run, the best solution for honey farmers may not be higher support prices, but rather finding ways to increase efficiency and reduce costs of production. This could involve adopting new technologies, improving farming practices, or exploring new markets for their products.
- 8. II. Macro Economy Câu1: Economic growth: human capital, technology, incentives of market, environment, capital resources, ... What does each country rely on for soaring growth? Why is the U.S. growing GDP more than other countries? Economic growth is a complex phenomenon influenced by various factors. Different countries rely on different drivers of growth, and the reasons behind the higher GDP growth of the United States compared to other countries are multifaceted. Here are some key factors that contribute to economic growth: 1. Human Capital: A skilled and educated workforce is vital for economic growth. Countries that invest in quality education, vocational training, and skill development programs can enhance their human capital. A highly skilled labor force can drive innovation, productivity, and competitiveness, leading to sustained economic growth. 2. Technological Advancement: Embracing and investing in technology and innovation is crucial for economic growth. Countries that promote research and development, encourage entrepreneurship, and foster an environment conducive to technological advancements can experience accelerated economic growth. Technological progress can lead to increased productivity, efficiency gains, and the development of new industries. 3. Market Incentives: Well-functioning markets with efficient allocation of resources, fair competition, and strong property rights protection provide the necessary incentives for economic growth. Countries that have open and competitive markets, favorable business environments, and supportive regulations attract investments, stimulate entrepreneurship, and drive economic growth. 4. Natural Resources: Abundance and efficient utilization of natural resources can positively contribute to economic growth in some countries. Nations rich in natural resources, such as oil, minerals, or fertile land, can leverage these resources to drive economic development and export earnings. However, it's important to manage these resources sustainably to ensure long-term growth and avoid dependency on volatile commodity prices. 5. Infrastructure and Capital Resources: Adequate infrastructure, including transportation, energy, and communication networks, is essential for economic growth. Access to reliable infrastructure and well-developed
- 9. capital resources facilitatesbusiness operations, trade, and investment, promoting economic development. Countries that invest in infrastructure development can attract investments, enhance productivity, and drive economic growth. Regarding the higher GDP growth of the United States compared to other countries, several factors contribute to this phenomenon: a. Technological Innovation: The United States has a long history of technological innovation and entrepreneurial spirit. The country has a robust research and development sector, significant investments in cutting-edge technologies, and a supportive environment for start-ups and innovation. This has contributed to the growth of high-tech industries, productivity gains, and overall economic growth. b. Market Size and Diversity: The U.S. market is large and diverse, offering significant opportunities for businesses to scale and grow. The size of the domestic market provides a strong foundation for economic growth, allowing companies to reach a substantial consumer base and benefit from economies of scale. The diversity of industries and sectors also contributes to resilience and adaptability in the face of economic challenges. c. Business Environment and Institutions: The United States has a well-developed business environment characterized by strong legal frameworks, protection of property rights, and efficient financial markets. This fosters entrepreneurship, attracts investments, and supports business growth. Additionally, institutions such as well-functioning regulatory bodies, transparent governance, and effective rule of law contribute to a conducive business environment and promote economic growth. d. Flexibility and Adaptability: The U.S. economy is known for its flexibility and ability to adapt to changing market conditions. This allows businesses to respond quickly to opportunities and challenges, fostering innovation and growth. The dynamic nature of the U.S. economy, combined with its openness to global trade and investment, contributes to its relatively higher GDP growth compared to some other countries. It's important to note that economic growth is influenced by a multitude of factors, and the relative importance of each factor can vary across countries. Different countries adopt different strategies and policies to foster economic growth based on their unique circumstances and available resources.
- 10. Câu 2: Tạisao khi crisis, MS ko gây lạm phát nhưng khi kinh tế bình thường thì gây lạm phát The relationship between money supply and inflation can vary depending on the state of the economy, specifically whether it is in a crisis or normal economic conditions. Let's examine the reasons for inflation and why the impact of money supply differs in these two scenarios: Reasons for Inflation: 1. Demand-Pull Inflation: This type of inflation occurs when aggregate demand exceeds the economy's ability to produce goods and services. When demand outpaces supply, prices rise. This can happen due to factors such as increased consumer spending, government expenditure, or exports. In such cases, excessive money supply can contribute to demand-pull inflation by increasing consumers' purchasing power and stimulating spending. 2. Cost-Push Inflation: Cost-push inflation arises when the costs of production, such as wages or raw materials, increase, and businesses pass on these higher costs to consumers through price hikes. Factors like rising energy prices, increased wages, or supply chain disruptions can cause cost-push inflation. Money supply does not directly cause this type of inflation, but it can exacerbate the situation by amplifying the impact of rising costs on prices. Impact of Money Supply in Crisis Economy: During a crisis, such as a severe economic downturn or recession, the relationship between money supply and inflation may not follow the usual pattern. In a crisis economy, several factors come into play that can influence the impact of money supply on inflation: 1. Reduced Aggregate Demand: During a crisis, consumers tend to cut back on spending, leading to a decrease in aggregate demand. This decrease in demand can counterbalance the effect of increased money supply, mitigating inflationary pressures. 2. Deflationary Pressures: In a crisis, there is often a risk of deflation, where prices overall start to decline. Deflation can occur due to weak consumer spending, excess capacity in production, or a lack of confidence in the economy. In such situations, even if money supply increases, the overall impact on prices may be limited or even negative.
- 11. 3. Lower Velocityof Money: The velocity of money refers to the speed at which money circulates through the economy. During a crisis, the velocity of money tends to decline as people hoard cash, businesses reduce investment, and lending activity slows down. When money circulates slowly, the impact of increased money supply on inflation is diminished. Impact of Money Supply in Normal Economy: In a normal, stable economy, the impact of money supply on inflation is more pronounced due to different conditions: 1. Stronger Aggregate Demand: In a normal economy, aggregate demand is generally stronger, and consumers have more purchasing power. When money supply increases, it can stimulate additional spending and push demand beyond the economy's capacity to produce, leading to inflationary pressures. 2. Normalized Velocity of Money: In a stable economy, the velocity of money tends to be higher as confidence and economic activity are stronger. When money circulates quickly, an increase in money supply can more readily translate into increased spending and inflation. 3. Inflation Expectations: In a normal economy, people and businesses have a general expectation that prices will gradually increase over time. This expectation can further amplify the impact of increased money supply on inflation, as consumers may spend more to avoid anticipated price increases, fueling demand-pull inflation. It's important to note that these are general tendencies, and the relationship between money supply and inflation is influenced by various other factors, such as government policies, global economic conditions, and market expectations. Central banks and policymakers closely monitor these dynamics to manage inflation and stabilize the economy. Câu 3: Based on financial crisis, explain the collapse of banks The collapse of banks during a financial crisis can be attributed to a combination of factors that contribute to their vulnerability and eventual failure. Here are some key factors that can lead to the collapse of banks in a financial crisis: 1. Asset Quality Deterioration: One of the primary reasons for bank failures during a financial crisis is the deterioration of asset quality. Banks often face significant losses when the value of their loan portfolios declines due to defaults, bankruptcies, or a sharp decrease in collateral values. In a crisis, economic conditions worsen, businesses struggle, and individuals face
- 12. financial hardships, leadingto increased loan defaults and a decline in asset values. This deterioration can erode the bank's capital base and impair its ability to absorb losses, ultimately leading to collapse. 2. Liquidity Issues: Liquidity refers to a bank's ability to meet its short-term obligations. During a financial crisis, banks may face severe liquidity problems as confidence in the financial system wanes, and depositors and creditors rush to withdraw their funds. If a bank cannot access sufficient funds to meet these withdrawals or obtain necessary short-term financing, it may become illiquid and unable to continue normal operations. This liquidity crunch can ultimately lead to the collapse of the bank. 3. Excessive Leverage: Banks often rely on borrowed funds to finance their operations and investments. Excessive leverage, or high levels of debt relative to the bank's capital, can amplify the risks and potential losses during a financial crisis. When market conditions worsen, assets decline in value, and funding becomes scarce, highly leveraged banks are more vulnerable to insolvency. The inability to service their debt obligations can result in bank failures. 4. Contagion and Interconnectedness: Financial crises tend to have a domino effect, where the collapse of one bank can trigger a chain reaction of failures. This contagion effect occurs due to the interconnectedness of the financial system. Banks are often counterparties to each other's transactions, and a collapse of confidence in one institution can lead to a loss of trust in others. As a result, depositors and creditors may rapidly withdraw funds from multiple banks, leading to a systemic banking crisis. 5. Inadequate Risk Management and Governance: Weak risk management practices and poor governance within banks can contribute to their collapse. If banks have inadequate risk assessment, insufficient capital buffers, or ineffective internal controls, they may not be able to identify and mitigate risks effectively. Additionally, flawed corporate governance structures and oversight can result in mismanagement and risky decision-making, further exacerbating the bank's vulnerabilities. 6. Regulatory and Supervisory Failures: Financial crises often highlight weaknesses in regulatory and supervisory frameworks. Inadequate regulations, lax enforcement, or regulatory arbitrage can allow banks to take excessive risks or engage in questionable practices. Regulatory failures can undermine the stability of the banking system, as weak oversight may fail to detect or address emerging risks in a timely manner, leading to bank collapses. It's important to note that each financial crisis is unique, and the specific causes and circumstances surrounding bank collapses can vary. However, the factors mentioned
- 13. above provide ageneral framework for understanding the vulnerabilities and risks that can lead to the collapse of banks during a financial crisis. 2023 banking crisis Over the course of five days in March 2023, three small- to mid-size U.S. banks failed, triggering a sharp decline in global bank stock prices and swift response by regulators to prevent potential global contagion. Silvergate Bank and Signature Bank, both with significant exposure to cryptocurrency, failed in the midst of turbulence in that market. Silicon Valley Bank (SVB) failed when a bank run was triggered after it sold its Treasury bond portfolio at a large loss, causing depositor concerns about the bank's liquidity. The bonds had lost significant value as market interest rates rose after the bank had shifted its portfolio to longer-maturity bonds. The bank's clientele was primarily technology companies and wealthy individuals holding large deposits, but balances exceeding $250,000 were not insured by the Federal Deposit Insurance Corporation (FDIC). In response to the bank failures, the three major U.S. federal bank regulators announced in a joint communiqué that extraordinary measures would be taken to ensure that all deposits at Silicon Valley Bank and Signature Bank would be honored.[1] The Federal Reserve established a Bank Term Funding Program (BTFP) to offer loans of up to one year to eligible depository institutions pledging qualifying assets as collateral.[2][3] To prevent the situation from affecting more banks, global industry regulators, including the Federal Reserve, the Bank of Canada, Bank of England, Bank of Japan, European Central Bank, and Swiss National Bank intervened to provide extraordinary liquidity.[4][5][6] Outside of the United States and other central banks, attempts to calm the banking crisis came most notably from Switzerland, where on March 19, Credit Suisse was acquired by rival UBS in a government-brokered deal with an attempt to halt the banking crisis. UBS and the Swiss government were praised for the deal, seen as a way to prevent Credit Suisse, itself considered a systemically important financial institution, from collapsing and causing further crisis within the banking system.[7][8] By March 16, large interbank flows of funds were occurring to shore up bank balance sheets and some analysts were talking of a possibly broader U.S. banking crisis.[9] The Federal Reserve discount window liquidity facility had experienced approximately $150 billion in borrowing from various banks by March 16.[10] Soon after the bank run at SVB, depositors quickly began withdrawing cash from San Francisco-based First Republic Bank (FRB), which focused on private
- 14. banking to wealthyclientele. Like SVB, FRB had substantial uninsured deposits exceeding $250,000; such deposits constituted 68% of the bank's total at year-end 2022, declining to 27% by the end of March, as $100 billion in uninsured deposits were withdrawn. Despite a $30 billion capital infusion from a group of major banks in March, FRB continued to destabilize and its stock price plummeted as the FDIC prepared to take it into receivership and find a buyer on April 29.[7][8] On May 1, the FDIC announced that First Republic had been closed and sold to JPMorgan Chase.[11][12] United States[edit] Further information: Cryptocurrency bubble § 2020–2022 cryptocurrency bubble, and 2021–2023 inflation surge Normal yield curve began inverting in July 2022, causing short-term Treasury rates to exceed long-term rates In the lead-up period, many banks within the United States had invested their reserves in U.S. Treasury securities, which had been paying low interest rates for several years. As the Federal Reserve began raising interest rates in 2022 in response to the 2021–2023 inflation surge, bond prices declined, decreasing the market value of bank capital reserves, causing some banks to incur unrealized losses; to maintain liquidity, Silicon Valley Bank sold its bonds to realize steep losses.[9] Also, several banks gained market exposure to cryptocurrency and cryptocurrency-related firms prior to and during the COVID-19 pandemic;[13] the 2020–2022 cryptocurrency bubble popped in late 2022.[14] In this environment, three such banks failed or were shut down by regulators: The first bank to fail, cryptocurrency-focused Silvergate Bank, announced it would wind down on March 8, 2023 due to losses suffered in its loan portfolio.[15][16] Two days later, upon announcement of an attempt to raise capital, a bank run occurred at Silicon Valley Bank, causing it to collapse and be seized by regulators that day.[15] Signature Bank, a bank that frequently did business with cryptocurrency firms, was closed by regulators two days later on March 12, with regulators citing systemic risks.[15][17][18] The collapses of First Republic Bank, Silicon Valley Bank and Signature Bank were the second-, third- and fourth-largest bank failures in the history of the United States, respectively, smaller only than the collapse of Washington Mutual during the 2007–2008 financial crisis.[19][failed verification]
- 15. In 2019, theFederal Reserve's "Tailoring rules" changed, increasing minimum asset threshold from $50 billion to $100 billion and reduced the number of required stress testing scenarios, allowing banks with under $100 billion to have reduced liquidity standards.[20] Signature Bank and First Republic Bank were under the $100 billion total assets for the Federal Reserve's tailoring rules, allowing the banks to have reduced regulation for liquidity.[21][22][23] Some have questioned if First Republic Bank would had a bank run if there were similar regulation to EU countries in the United States.[24] Liquidation of Silvergate Bank[edit] Further information: Silvergate Bank § Liquidation Background[edit] Silvergate Bank is a California-based bank that began operations in 1988 as a savings and loan association. In the 2010s, the bank began to provide banking services to players within the cryptocurrency market. The bank sought regulatory approval in the summer of 2014 to do business with cryptocurrency firms. The bank expanded the assets on its balance sheet significantly—doubling its assets in its 2017 fiscal year to $1.9 billion—by servicing cryptocurrency exchanges and other companies who were involved in the cryptocurrency business that could not secure financing from larger, more conservative banks. Despite its rapid growth, the company maintained a small physical footprint; in 2018, the bank had only three branches, all located in Southern California.[25] By the fourth quarter of 2022, 90% of the bank's deposits had become cryptocurrency-related, with over $1 billion in deposits being tied to Sam Bankman-Fried.[26] In addition to providing traditional banking services to its cryptocurrency clients, the bank operated as a clearinghouse for its banking clients; it involved itself in the business of resolving and settling transactions in real-time through its proprietary Silvergate Exchange Network. The network allowed a client to send payments in U.S. dollars from its accounts with Silvergate to those of another client of the bank without requiring an interbank wire transfer. A large number of cryptocurrency companies set up accounts with the bank to take advantage of Silvergate's relatively quick transaction settling times.[25] Silvergate stock price (2019–2023) Despite conducting the majority of its business with cryptocurrency companies, Silvergate's investment portfolio was fairly conservative; the company took large positions in mortgage-backed securities as well as U.S. bonds.[27] These sorts of
- 16. assets, while reliableto be paid-in-full through their maturity date, carry risks associated with changes in interest rates; there is an inverse relationship between the mark-to-market value of a bond and the bond's yield. As interest rates shot up during the 2021–2023 inflation surge, the mark-to-market price of these securities decreased significantly. When these losses are unrealized, this does not typically cause the bank to cease operating, as the bank will receive payment-in-full under the original terms of the bond. However, if forced to sell these securities at a lower mark- to-market price, the losses on these types of assets become realized, posing significant risks to the bank's ability to continue to operate.[27] Events[edit] Silvergate was hit with a bank run in the wake of the bankruptcy of FTX; deposits from cryptocurrency-related firms dropped by 68% at the bank, with the bank facing requests from its clients to withdraw upwards of $8 billion in deposits.[26] As Silvergate did not have enough cash-on-hand to satisfy the deposit withdrawals, the bank began to sell its assets at a steep loss; the company realized a loss of $718 million on withdrawal-related asset sales in the fourth fiscal quarter of 2022 alone.[26][27][28] The bank, in a public statement, said that it was solvent at the end of Q4 2022, with an asset sheet containing assets of $4.6 billion in cash and $5.6 billion in liquid debt securities, with $3.8 billion in deposit obligations.[26] Silvergate faced tight financial constraints in the coming months, selling assets at a loss and borrowing $3.6 billion from the Federal Home Loan Bank of San Francisco to maintain its liquidity.[29] Silvergate wrote in a regulatory filing on March 1 that the bank risked losing its status as a well-capitalized bank and that the bank faced risks relating to its ability to continue operating.[16][30] Facing continued losses from sales of securities at mark-to-market price, Silvergate released a public notice on March 8, 2023, saying that it would undergo voluntary liquidation and would return all deposited funds to their respective owners.[16][18][27] Collapse of Silicon Valley Bank[edit] Main article: Collapse of Silicon Valley Bank Background[edit] Silicon Valley Bank (SVB) was a commercial bank founded in 1983 and headquartered in Santa Clara, California. Until its collapse, SVB was the 16th largest bank in the United States and was heavily skewed toward serving companies and individuals from the technology industry.[31][32][33] Nearly half of U.S. venture capital-backed healthcare and technology companies were financed by SVB.[34] Companies such as Airbnb, Cisco, Fitbit, Pinterest, and Block, Inc. have
- 17. been clients ofthe bank.[35] In addition to financing venture-backed companies, SVB was well known as a source of private banking, personal credit lines, and mortgages to tech entrepreneurs.[36] According to the FDIC, it had $209 billion in assets at the end of 2022.[37] Silicon Valley Bank recorded an increase of its deposit holdings during the COVID- 19 pandemic, when the tech sector experienced a period of growth. In 2021, it purchased long-term Treasury bonds to capitalize on the increased deposits. However, the current market value of these bonds decreased as the Federal Reserve raised interest rates to curb the 2021–2023 inflation surge.[38] Higher interest rates also raised borrowing costs throughout the economy and some Silicon Valley Bank clients started pulling money out to meet their liquidity needs.[39] Events[edit] To raise cash to pay withdrawals by its depositors, SVB announced on March 8 that it had sold over US$21 billion worth of securities, borrowed US$15 billion, and would hold an emergency sale of some of its treasury stock to raise US$2.25 billion. The announcement, coupled with warnings from prominent Silicon Valley investors, caused a bank run as customers withdrew funds totaling US$42 billion by the following day.[39] On March 10, 2023, as a result of the bank run, the California Department of Financial Protection and Innovation (DFPI) seized SVB and placed it under the receivership of the FDIC. The FDIC established a deposit insurance national bank, the Deposit Insurance National Bank of Santa Clara, to service insured deposits and announced that it would start paying dividends for uninsured deposits the following week; the dividends were funded by proceeds from the sale of SVB assets. Some 89 percent of the bank's US$172 billion in deposit liabilities exceeded the maximum insured by the FDIC.[40][41] Two days after the failure, the FDIC received exceptional authority from the Treasury and announced jointly with other agencies that all depositors would have full access to their funds the next morning.[42][43] An initial auction of Silicon Valley Bank assets on the same day attracted a single bid,[44] after PNC Financial Services and RBC Bank backed away from making offers.[45][46] The FDIC rejected this offer and plans to hold a second auction to attract bids from major banks, now that the bank's systemic risk designation allows the FDIC to insure all deposits.[44] The bank was later reopened as a newly organized bridge bank, Silicon Valley Bridge Bank, N. A.[47] On March 26, 2023, the FDIC announced that First Citizens BancShares would acquire the commercial banking business of SVB.[48][49] As part of the deal, First Citizens brought around $56.5 billion in deposits and $72 billion of SVB's loans discounted by $16.5 billion, while around $90 billion of SVB's securities continue
- 18. to remain inreceivership.[50] The FDIC received about $500 million-worth of equity appreciation rights linked to First Citizens' shares.[51] SVB's 17 branches reopened under the First Citizens brand the next day, with all SVB depositors becoming depositors of First Citizens. SVB Private was initially going to be auctioned separately but First Citizens later acquired the business as well.[52] Collapse of Signature Bank[edit] Further information: Signature Bank § Collapse Background[edit] Signature Bank stock price (2006–2023) Signature Bank was a New York City-based bank founded in 2001.[53] The bank began as a subsidiary of Bank Hapoalim that took on clients with assets of around $250,000, lending to small businesses based in New York City and in the surrounding metropolitan area.[54] The bank provided financing within the multifamily residential rental housing market in the New York metropolitan area beginning in 2007,[55][56] though it began to reduce its exposure to the market during the 2010s.[57] By 2019, just over four-tenths of the value of the bank's loans were made to multifamily homeowners in the New York metropolitan area, comprising $15.8 billion of the bank's then-$38.9 billion in net loans.[57][58] Beginning in 2018, Signature Bank began to court customers in the cryptocurrency industry, securing hires that were experienced in the area with the goal of moving away from its dependence on real estate lending.[59] The quantity of deposits held at the bank expanded significantly, with deposits increasing from about $36.3 billion at the end of the 2018 fiscal year to $104 billion by August 2022; that month, over one-quarter of the bank's deposits held were those of cryptocurrency companies.[58][59] Its cryptocurrency-sector clients included large cryptocurrency exchange operators, such as Celsius Network and Binance.[18][59] By early 2023, Signature Bank had become the second largest provider of banking services to the cryptocurrency industry—second only to Silvergate Bank.[60] In addition to providing traditional banking services to cryptocurrency clients, Signature Bank opened a proprietary payment network for use among its cryptocurrency clients. The payment network, Signet, had opened in 2019 for approved clients, and allowed the real-time gross settlement of fund transfers through the blockchain without third parties or transaction fees. By the conclusion of 2020, Signature Bank had 740 clients using Signet.[61][62] The network continued
- 19. to expand duringthe following years; both Coinbase and the TrueUSD dollar- pegged stablecoin had become integrated with Signet in 2022 and 2021, respectively.[63] Events[edit] Reporters ask questions to Signature Bank customers exiting a New York location. As cryptocurrency prices dropped significantly in 2022, particularly so after the collapse of cryptocurrency exchange FTX, depositors in Signature Bank began to withdraw deposits in the tune of billions of dollars; by the end of 2022, deposits in the bank totaled around $88.6 billion, down from $106.1 billion in deposits held at the beginning of the year—a time when over one-quarter of deposits were held by digital asset-related entities.[18][58] Towards the end of 2022, Signature Bank cut business ties with cryptocurrency exchange Binance, seeking to reduce the bank's exposure to risk associated with the cryptocurrency market.[18] According to Signature Bank board member Barney Frank, Signature Bank was hit with a multi- billion dollar bank run on Friday, March 10, with depositors expressing concern about cryptocurrency-related risks affecting the bank.[18] Investor confidence in the bank was also badly shaken, and the bank's stock declined by 23% on that Friday— the day on which Silicon Valley bank collapsed—marking the then-largest single- day decline of the Signature Bank's value in its 22-year history.[64] On March 12, 2023, two days after the collapse of Silicon Valley Bank, Signature Bank was closed by regulators from the New York State Department of Financial Services in what is the third-biggest banking collapse in U.S. history.[15][18] The bank proved unable to close a sale or otherwise bolster its finances before markets opened on Monday morning in order to protect its assets after customers began withdrawing their deposits in favor of bigger institutions,[18] and shareholders of the bank lost all invested funds.[65] The bank was placed under receivership by the FDIC, which immediately established Signature Bridge Bank, N.A. to operate its marketed assets to bidders.[66] Signature Bank had been under multiple federal investigations that were ongoing at the time of the bank's collapse regarding the rigor of its anti-money laundering measures. The U.S. Department of Justice had opened a criminal probe
- 20. into whether thefirm was performing due diligence when opening up new accounts and whether it was doing enough to detect and report potential criminal activity by its clients. The U.S. Securities and Exchange Commission had opened a separate, related civil probe.[67][68] On March 19, the New York Community Bank (NYCB) agreed to purchase around $38.4 billion in Signature's assets for $2.7 billion. Due to the deal, 40 Signature branches were rebranded to Flagstar Bank, one of NYCB's subsidiaries.[69] Collapse of First Republic Bank[edit] Further information: First Republic Bank § Collapse First Republic Bank Stock Price Background[edit] This section needs expansion with: a summary with a level of detail about the general operations and history equivalent to the other banks. You can help by adding to it. (May 2023) The San Francisco-based First Republic Bank (FRB) was a commercial bank and provider of wealth management services. It catered to high-net-worth individuals and operated 93 offices in 11 states, primarily in New York, California, Massachusetts, and Florida.[22] It was the 14th largest U.S. bank at the end of 2022.[70] Events[edit] Intense scrutiny and pressure were applied to other U.S. banks, including FRB.[71] On March 13, its shares fell by 62%.[72] As the bank faced significant liquidity issues, on March 16, it received a $30 billion lifeline in the form of deposits from a number of major U.S. banks, on top of a $70 billion financing facility provided by JPMorgan Chase & Co.[73][74] Eleven of the largest U.S. banks participated in the rescue effort,[75] under the direction of Jamie Dimon.[76] On March 19, S&P Global downgraded the credit rating of First Republic Bank further into junk by three notches saying that the private-sector rescue effort "may not solve the substantial business, liquidity, funding, and profitability challenges that we believe the bank is now likely facing."[77] In its quarterly report in April, the bank said that deposits had plunged by more than $100 billion. The announcement caused the bank's share price to fall by more than 20%.[78]
- 21. On April 28,the bank announced plans to begin selling its bonds and securities at a loss to raise equity and also begin laying off people.[79] Multiple advisor teams began to leave the bank as well.[80] On that day, it was announced that the FDIC was considering seizing the bank, causing its stock price to plunge another 43% to $3.50.[79][81] After falling another 42% in after hours trading, the FDIC confirmed its imminent takeover of the bank.[82][83] In 2023, the cumulative decrease in stock price was 97%.[84] The next day, the FDIC approached various banks, including JPMorgan Chase, PNC and Bank of America, saying they had until April 30 to place bids for First Republic Bank.[85] On the morning of May 1, the California Department of Financial Protection and Innovation announced that FRB had been closed, and its assets were sold to JPMorgan for $10.6 billion.[86] Federal response[edit] Bank Term Funding Program[edit] In response to the bank failures of March, the government took extraordinary measures to mitigate fallout across the banking sector.[18] On March 12, Federal Reserve created the Bank Term Funding Program (BTFP), an emergency lending program providing loans of up to one year in length to banks, savings associations, credit unions, and other eligible depository institutions that pledge U.S. Treasuries, agency debt and mortgage-backed securities, and other qualifying assets as collateral.[2][3][87] The program is designed to provide liquidity to financial institutions, following the collapse of Silicon Valley Bank and other bank failures, and to reduce the risks associated with current unrealized losses in the U.S. banking system that totaled over $600 billion at the time of the program's launch.[88] Funded through the Deposit Insurance Fund,[89] the program offers loans of up to one year to eligible borrowers who pledge as collateral certain types of securities including U.S. Treasuries, agency debt, and mortgage-backed securities.[90] The collateral will be valued at par instead of open-market value, so a bank can borrow on asset values that have not been impaired by a series of interest rate hikes since 2022. The Federal Reserve also eased conditions at its discount window. The Department of the Treasury will make available up to $25 billion from its Exchange Stabilization Fund as a backstop for the program.[91] In addition to working with their counterparts at the FDIC and U.S. Treasury to provide liquidity to banks through the BTFP, the Federal Reserve has begun to internally discuss implementing stricter capital reserve and liquidity requirements for banks with between $100 billion and $250 billion in assets on their balance sheets.[92] A review of regulations affecting regional banks has been ongoing since 2022, as Federal Reserve vice chairman Michael Barr and other officials in
- 22. the Biden Administrationhad become increasingly concerned about the risk posed to the financial system by the rapidly increasing size of regional banks.[92][93] U.S. investigations[edit] The collapse of Silicon Valley Bank itself has also spurred federal investigations from the U.S. Securities and Exchange Commission as well as the United States Department of Justice. Within the scope of both probes is the sales of stock made by senior officers of Silicon Valley Bank shortly before the bank failed, while the SEC's investigation also includes a review of past financial- and other risk-related disclosures made by Silicon Valley Bank to evaluate their accuracy and completeness.[94] Aftermath of bank failures[edit] As depositors began to move money en masse from smaller banks to larger banks,[18][71] on Monday, March 13, shares of regional banks fell.[72] Bitcoin price Following SVB and Signature's collapses, Western Alliance Bancorporation share price fell 47% and PacWest Bancorp was down 21% recovering after their trading was halted.[95][96] Moody's downgraded its outlook on the U.S. banking system to negative, citing what it described as "rapid deterioration" of the sector's financial footing.[97] It also downgraded the credit ratings of several regional banks, including Western Alliance, First Republic, Intrust Bank, Comerica, UMB Financial Corporation, and Zions Bancorporation.[98] Large declines in regional bank stocks continued after First Republic's failure.[99] U.S. President Joe Biden made a statement about the first three bank failures on March 13, and asserted that government intervention was not a bailout and that the banking system was stable.[100][101] The initial bank failures led to speculation on 13 March that the Federal Reserve could pause or halt rate hikes.[102] Beginning on March 13, traders began modifying their strategies in the expectation that fewer hikes than previously expected will occur.[103] Some financial experts suggested that the BTFP, combined with a recent practice of finding buyers who would cover all deposits, may have effectively removed the FDIC's $250,000 deposit insurance limit.[104] However, Treasury Secretary Janet Yellen clarified that any guarantee beyond that limit would need the approval of the Biden administration and Federal regulators.[105] The initial three bank failures and resulting pressures on other U.S. regional banks were expected to reduce available financing in the commercial real estate market and further slow commercial property development.[106] The Federal Reserve's
- 23. discount window liquidityfacility saw around $150 billion in borrowing from various banks by March 16,[10] more than 12 times the $12 billion that the BTFP provided.[107] Since the majority of First Republic's long term assets were in municipal bonds, it was unable to make full use of the BTFP as those assets did not qualify as an eligible collateral.[108] By 16 March, large inter-bank flows of funds were occurring to shore up bank balance sheets and numerous analysts were reporting on a more general U.S. banking crisis. Many banks had invested their reserves in U.S. Treasury securities, which had been paying low interest rates. As the Federal Reserve began raising rates in 2022, bond prices declined decreasing the market value of bank capital reserves, leading some banks to sell the bonds at steep losses as yields on new bonds were much higher.[9] The Federal Reserve's discount window liquidity facility had experienced approximately $150 billion in borrowing from various banks by March 16.[10] On 17 March, President Biden stated that the banking crisis had calmed down,[109] while the New York Times said that the March banking crisis was hanging over the economy and had rekindled fear of recession as business borrowing would become more difficult as many regional and community banks would have to reduce lending.[110][111] Late on Sunday, the Federal Reserve and several other central banks announced significant USD liquidity measures in order to calm market turmoil.[112] In a "coordinated action to enhance the provision of liquidity through the standing U.S. dollar swap line arrangements", the U.S. Federal Reserve, the Bank of Canada, Bank of Japan, European Central Bank, and Swiss National Bank joined together to organize daily U.S. dollar swap operations. These swaps had previously been set up to occur on a weekly cadence.[113] The share price of PacWest had fallen sharply on 3 May after the bank announced that it was 'considering strategic options including a sale'. On 4 May share trading was suspended as the sell-off marked a further 42% loss with other US regional banks, including First Horizon, Metropolitan Bank and Western Alliance, also being affected.[114][115] In May 2023, FDIC proposed imposing higher fees on an estimated 113 of the largest banks to cover the costs of bailing out uninsured depositors.[116] International impact[edit] By Sunday, 19 March, concerns about the banking sector internationally had increased.[4][5][6][117][118] That day, Swiss bank UBS Group AG bought its smaller competitor Credit Suisse in an emergency arrangement brokered by the Swiss
- 24. government. One monthbefore the events in the United States, Credit Suisse announced its largest annual loss since the 2008 financial crisis, as clients continued withdrawing their cash at a rapid pace; $147 billion had been withdrawn in the fourth quarter of 2022. It also disclosed it had found "material weaknesses" in its financial reporting. Its largest investor, Saudi National Bank, announced on March 15 that it would not provide more support to Credit Suisse. Its share price plunged 25% on the news and UBS stepped in to buy the bank. Axel Lehmann, former chairman of the bank, later sought to blame the American bank failures for triggering Credit Suisse's demise, though other analysts disputed that characterization. The bank had experienced many years of multi-billion dollar losses, scandals, executive turnover and weak business strategy.[119] Late on Sunday the Federal Reserve and several other central banks announced significant USD liquidity measures in order to calm market turmoil.[117] In a "coordinated action to enhance the provision of liquidity through the standing U.S. dollar swap line arrangements", the U.S. Federal Reserve, the Bank of Canada, Bank of Japan, European Central Bank (ECB) and Swiss National Bank joined together to organize daily U.S. dollar swap operations. These swaps had previously been set up to occur on a weekly cadence.[113] On 21 March, The Business Times reported that Asian central banks were "unlikely to be greatly influenced by the banking crisis in the United States and Europe",[120] but Australia's central bank governors met and publicly indicated a potential pause in recent rate hikes. ABC News reported that the challenge for central banks is determining if the "banking turmoil close to crashing the real economy, or is inflation still the greater threat."[121] In Japan the three main lenders, Mitsubishi UFJ Financial Group, Sumitomo Mitsui Financial Group and Mizuho Financial Group, lost share value between 10% and 12% due to the market turmoil and their exposure to the bond market.[122] Japan's central bank held a crisis meeting in mid- March while the Topix banks index fell 17%. The fall was led by fears over the SVB collapse and the risks in Japan's regional banking sector, partly because of exposure to US interest rate hikes.[123] The cost to insure against default on Deutsche Bank debt rose substantially on Friday, 24 March, with the 5-year CDS for the bank's debt rising 70%.[124] The ECB and other European central banks raised interest rates the same day.[125] The European STOXX 600 index fell around 4% with shares in Deutsche Bank down more than 14% at one point, closing the day at a loss of around 8%.[126] The UK's banking index also fell around 3% led by falls of around 6% for both Barclays and Standard Chartered and a 4% drop for NatWest. Shares in other European banks also fell, among them Commerzbank, Austria's Raiffeisen Bank and the French Société Générale.[127][128][129] According to the European
- 25. Commission's Paolo Gentiloni,finance ministers in the Euro zone called on the Commission to close loopholes in Crisis Management and Deposit Insurance (CMDI) provision, starting in the second quarter of 2023.[130] Chinese banks experienced little negative effect. According to Bloomberg News, almost all of the 166 top performers during the market turmoil were in China. The banking crisis in the U.S. and Europe highlighted the relative stability of the Chinese banking system. While China's recovery from the pandemic remains fragile, inflation there is muted, and the People's Bank of China had adjusted interest rates at a slower pace than Western central banks.[131] The turbulence in the financial system caused India's central bank to put any further hikes in interest rate on hold on 6 April, with governor Shaktikanta Das saying "it's a pause not a pivot". A 25 basis point increase had been widely expected. Central banks in Australia, Canada and Indonesia also paused any further increases.[132] While rising interest rates give banks greater returns on customer's loans, the tighter financial conditions meant the sector saw a downturn in equity funding, with the S&P 500 bank index (SPXBK) in April down 14% year to date on expectation of lower quarterly earnings for some US banks.[133] On 11 April the International Monetary Fund downgraded its forecast for GDP growth globally in 2023 from 2.9% to 2.8%, saying "Uncertainty is high and the balance of risks has shifted firmly to the downside so long as the financial sector remains unsettled". The forecast marked a slowdown from 3.4% in 2022, but predicted growth could rise modestly to 3.0% in 2024.[134] The IMF had been cutting its forecast since spring 2022.[135][136] Bank crisis: The banking crisis described in your statement has significant implications for the US, global, and Vietnam economies. Let's examine the effects on each and discuss potential actions the Federal Reserve (Fed) and government could take. 1. Effects on the US Economy: a. Financial Stability: The bank failures and subsequent turmoil led to a decline in bank stock prices, increased borrowing from the Federal Reserve discount window, and concerns about the stability of the banking system. This instability can affect consumer and investor confidence, potentially leading to reduced lending, investment, and economic activity. b. Credit Availability: The crisis may result in a reduction in available financing, particularly in the commercial real estate market. Regional and community banks, facing pressures and potential losses, may be compelled to reduce lending, impacting businesses and individuals reliant on credit. c. Regulatory Response: The government and regulatory bodies, including the Fed and FDIC, responded by implementing measures to restore confidence and stability. The Bank Term Funding Program (BTFP) was established to provide emergency loans to eligible depository
- 26. institutions. Stricter capitalreserve and liquidity requirements for banks with assets between $100 billion and $250 billion are also being considered. 2. Effects on the Global Economy: a. Contagion Risks: The failures of US banks and the subsequent market turbulence triggered concerns about global contagion. As seen in the case of Credit Suisse, international banks can face significant challenges and require government intervention to prevent further crisis. The coordinated actions of central banks aimed to enhance liquidity provision and stabilize the international financial system. b. Market Volatility: The banking crisis led to stock market declines, particularly impacting financial institutions. Moody's downgraded the outlook on the US banking system, and credit ratings for several regional banks were lowered. The global banking turmoil, along with other factors, could rekindle fears of a potential recession and impact business borrowing and lending worldwide. 3. Effects on the Vietnam Economy: a. Investor Confidence: The banking crisis and its global repercussions can affect investor sentiment and confidence in the financial system, potentially leading to a decline in foreign investments. b. Economic Outlook: The turmoil in the US and global financial sectors can have spillover effects on the Vietnamese economy, particularly through trade and investment channels. If global economic growth slows or financial instability persists, it can impact Vietnam's export-oriented industries and overall economic outlook. Actions by the Fed and Government: 1. Bank Term Funding Program (BTFP): The Federal Reserve established the BTFP, an emergency lending program that offered loans of up to one year to eligible depository institutions. Banks, savings associations, credit unions, and other qualified institutions could pledge qualifying assets such as U.S. Treasuries, agency debt, and mortgage-backed securities as collateral to access funding. The program aimed to provide liquidity to financial institutions and mitigate the risks associated with unrealized losses in the banking system. 2. Discount window liquidity facility: The Federal Reserve eased conditions at its discount window, which is a lending facility for banks to borrow funds from the central bank. During the banking crisis, various banks borrowed approximately $150 billion from the discount window to shore up their balance sheets and address liquidity concerns. 3. Stricter capital reserve and liquidity requirements: The Federal Reserve internally discussed implementing stricter capital reserve and liquidity requirements for banks with assets between $100 billion and $250 billion. This review of regulations aimed to enhance the stability and resilience of regional banks and mitigate risks to the financial system. 4. Coordinated global liquidity measures: The Federal Reserve, along with other major central banks including the Bank of Canada, Bank of England, Bank of Japan, European Central Bank, and Swiss National Bank, intervened to provide extraordinary liquidity measures. These central banks organized daily U.S. dollar swap operations to enhance the provision of liquidity through existing swap line arrangements. The effects of these Fed actions were aimed at stabilizing the banking system, mitigating the risks of further bank failures, and restoring confidence in the financial markets. Here are some of the effects: 1. Liquidity provision: The Fed's actions through the BTFP and discount window facility provided financial institutions with access to much-needed liquidity. This helped alleviate immediate funding pressures and prevented potential bank runs.
- 27. 2. Deposit safety:The joint communiqué by the federal bank regulators, including the FDIC, assured depositors that all deposits at Silicon Valley Bank and Signature Bank would be honored. This reassurance aimed to prevent a loss of confidence in the banking system and a widespread withdrawal of deposits. 3. Market stabilization: The coordinated global liquidity measures provided by central banks helped calm market turmoil and prevent further disruptions in the financial system. These measures aimed to restore stability and confidence in the markets, reducing the negative impact on stock prices and preventing a broader financial crisis. 4. Regulatory improvements: The discussions around implementing stricter capital reserve and liquidity requirements for regional banks signaled a commitment to strengthening the banking sector's resilience. These potential regulatory improvements aimed to mitigate future risks and enhance the overall stability of the financial system. It's important to note that the specific effects on the U.S., world, and Vietnam economies would depend on various factors, including the severity of the banking crisis, the overall health of the economies, and the effectiveness of the measures taken. However, the actions of the Federal Reserve and other central banks were intended to restore stability, prevent systemic risks, and support economic recovery. Câu 4: Why does inflation rise, the state must increase interest rates, reduce the Money Supply? Or during the pandemic, what was monetary policy like? Why increase the money supply, reduce interest? How will rising / falling interest rates affect the economy? Inflation typically rises when there is an excess of money in the economy chasing the limited supply of goods and services. To control inflation, central banks may implement monetary policy measures, such as increasing interest rates and reducing the money supply. However, during the pandemic, the monetary policy response was different due to the unique circumstances. Let's explore these concepts in more detail: 1. Controlling Inflation: When inflation rises, central banks often increase interest rates and reduce the money supply to curb excessive spending and dampen price pressures. Increasing interest rates makes borrowing more expensive, reducing consumer and business spending, thereby slowing down economic activity. Simultaneously, reducing the money supply limits the availability of funds in the economy, further curbing spending. 2. Monetary Policy during the Pandemic: During the COVID-19 pandemic, many countries implemented expansionary monetary policies to counteract the severe economic contraction. The primary aim was to support businesses and households by injecting liquidity into the economy and lowering borrowing costs. Central banks reduced interest rates to near-zero levels or implemented unconventional measures like quantitative easing (QE) to
- 28. increase the moneysupply. These actions were taken to stimulate economic activity, boost lending, and prevent a deep and prolonged recession. 3. Increasing Money Supply and Reducing Interest Rates: During the pandemic, increasing the money supply and reducing interest rates were part of the expansionary monetary policy response. By increasing the money supply, central banks aimed to provide liquidity to financial markets, support lending, and ensure the availability of funds for businesses and households. Lowering interest rates made borrowing cheaper, incentivizing investment, consumption, and lending activities, which were crucial during the economic downturn. 4. Impact of Rising/Falling Interest Rates on the Economy: Rising or falling interest rates can have various effects on the economy: Rising Interest Rates: Increasing interest rates can have a cooling effect on the economy. It makes borrowing more expensive, reducing consumer spending and business investment. Higher borrowing costs can lead to a slowdown in economic activity, including housing markets, as mortgage rates rise. Rising interest rates can also attract foreign investors seeking higher returns on their investments, potentially appreciating the currency. Falling Interest Rates: Lowering interest rates can stimulate economic growth. It reduces borrowing costs, encouraging consumer spending, business investment, and borrowing. Lower rates make housing more affordable, leading to increased demand in the real estate sector. Additionally, lower interest rates can devalue a currency, making exports more competitive in international markets. It's important to note that the impact of interest rates on the economy is not always immediate or uniform across all sectors. Other factors, such as fiscal policies, market conditions, and global economic dynamics, also influence the overall economic outcomes. Some Moneytary policy during Pandemic: During the pandemic, central banks pursued expansionary monetary policies to mitigate the adverse effects of the crisis. However, as the situation evolves and economic recovery progresses, central banks may gradually adjust their policies, including increasing interest rates and reducing the money supply, to manage inflationary pressures and ensure sustainable economic growth. During the COVID-19 pandemic, central banks around the world implemented various monetary policy measures to support their economies and mitigate the
- 29. impact of thecrisis. Here are some common monetary policy actions taken during the pandemic: 1. Interest Rate Reductions: Central banks lowered interest rates to historically low levels to stimulate borrowing and spending. By reducing the cost of borrowing, central banks aimed to encourage businesses and households to continue investing, spending, and borrowing amidst the economic downturn. In some cases, central banks even implemented negative interest rates to further incentivize borrowing and discourage saving. 2. Quantitative Easing (QE): Many central banks implemented or expanded their quantitative easing programs. QE involves the purchase of government bonds or other assets by central banks from commercial banks and other financial institutions. By injecting liquidity into the financial system, central banks aimed to maintain market functioning, support lending, and prevent a credit crunch. 3. Liquidity Provision: Central banks provided ample liquidity to financial institutions to ensure the smooth functioning of financial markets. They offered short-term loans and expanded their lending facilities to provide funds to banks and other financial institutions, ensuring that credit remained available and accessible during the crisis. 4. Credit and Loan Support: Central banks collaborated with governments to implement credit and loan support programs. These programs aimed to provide financial assistance and liquidity to businesses, particularly small and medium-sized enterprises (SMEs), that were severely impacted by the pandemic-induced economic disruptions. Central banks provided funds to commercial banks at low interest rates, with conditions to encourage lending to affected businesses. 5. Regulatory Flexibility: In response to the crisis, central banks temporarily relaxed certain regulatory requirements to ease financial burdens on banks and facilitate lending. They adjusted capital adequacy ratios, liquidity requirements, and loan classification standards to provide banks with more flexibility to support the economy. These measures aimed to ensure that banks had sufficient capacity to provide loans and support businesses and households. 6. Forward Guidance: Central banks provided forward guidance to communicate their intentions regarding future monetary policy actions. They offered clarity on their policy stance, interest rate expectations, and economic outlook. Forward guidance aimed to provide stability, manage market expectations, and guide businesses and investors in their decision-making.
- 30. It's important tonote that the specific actions taken by central banks varied across countries, reflecting their unique economic circumstances and policy frameworks. The main objective of these measures was to mitigate the adverse effects of the pandemic, support economic recovery, and maintain financial stability during a period of significant uncertainty and disruption. Câu 5: By 2014, China had accumulated $4 trillion in international reserves. China’s rapid growth of productivity, accompanied by an inflation rate lower than that of the U.S., caused the long-run value of the yuan to increase. The Chinese central bank engaged in massive purchases of U.S. dollar assets to maintain the fixed relationship between the Chinese yuan and the U.S. dollar. How Did China Accumulate $4 Trillion of International Reserves? China accumulated $4 trillion in international reserves primarily through its persistent trade surpluses and capital inflows. Here are the key factors that contributed to China's significant accumulation of international reserves: 1. Trade Surpluses: China has been running consistent trade surpluses for many years, meaning its exports exceed its imports. This surplus generates a substantial inflow of foreign currency, primarily in the form of U.S. dollars, as the U.S. has been one of China's largest trading partners. To maintain the fixed relationship between the yuan and the U.S. dollar, China's central bank, the People's Bank of China (PBOC), purchases the excess U.S. dollars by selling yuan and accumulates them as international reserves. 2. Foreign Direct Investment (FDI): China has attracted significant foreign direct investment over the years. Foreign companies and investors have been attracted to China's large and growing market, low labor costs, and favorable investment climate. These inflows of foreign capital also contribute to the accumulation of international reserves as the PBOC converts the incoming foreign currency into yuan to maintain the fixed exchange rate. 3. Capital Inflows and Investment Flows: China has experienced substantial capital inflows from various sources, including portfolio investments, foreign institutional investors, and foreign banks. These inflows occur when foreign entities invest in Chinese stocks, bonds, or other financial assets. The PBOC accumulates the foreign currency received from these investments as international reserves. 4. Foreign Exchange Intervention: To maintain the fixed exchange rate between the yuan and the U.S. dollar, the PBOC actively intervenes in the foreign exchange market. It buys excess U.S. dollars and sells yuan,
- 31. increasing its foreigncurrency reserves. By intervening in the foreign exchange market, the PBOC aims to stabilize the yuan's value and avoid significant fluctuations. 5. Export-Oriented Economy: China has been known for its export-oriented economy, with a strong emphasis on manufacturing and exporting a wide range of goods and products. This export focus, along with competitive pricing and global demand for Chinese goods, has contributed to China's consistent trade surpluses and the resulting accumulation of international reserves. It's important to note that China's large accumulation of international reserves has implications for its economic policies and global economic dynamics. It provides China with significant financial resources and a level of stability in its foreign exchange reserves. However, it can also create challenges, such as concerns about exchange rate management, trade imbalances, and potential disruptions in global financial markets. Câu 6: Why in 2022: Vietnam has a tightening policy: selling off foreign exchange reserves? Increase the exchange rate trading spread? Interest rate hikes? By 2023 easing: buying back foreign exchange reserves, April reducing operating rates? The specific policies and actions undertaken by a country's central bank, such as Vietnam's State Bank of Vietnam (SBV), can be influenced by various factors and objectives. While I don't have access to the latest specific data and developments in 2022 and 2023, I can provide a general understanding of the measures you mentioned based on economic principles and common policy tools. Please note that the actual policy decisions in Vietnam may vary based on the prevailing economic conditions and goals of the SBV. 1. Tightening Policy in 2022: a. Selling off foreign exchange reserves: Selling off foreign exchange reserves is typically done to stabilize the domestic currency in the foreign exchange market. If the Vietnamese dong was facing significant depreciation or speculative pressures, the SBV may have sold foreign exchange reserves to intervene in the market and support the currency's value. b. Increase in exchange rate trading spread: The exchange rate trading spread refers to the difference between the buying and selling prices of foreign currencies in the
- 32. market. Widening thetrading spread can discourage excessive currency speculation and promote stability. This measure may have been implemented to manage volatility and discourage short-term speculative activities in the foreign exchange market. c. Interest rate hikes: Increasing interest rates is a common tool used by central banks to curb inflationary pressures and attract capital inflows. If Vietnam was experiencing high inflation or capital outflows, raising interest rates could help stabilize prices and strengthen the attractiveness of domestic currency assets. It could also encourage capital inflows, which can support the currency and the overall economy. 2. Easing Policy in 2023: a. Buying back foreign exchange reserves: Buying back foreign exchange reserves indicates a shift in policy to increase the stock of reserves. This action may have been taken to rebuild the country's foreign exchange buffers, enhance confidence in the currency, and provide a cushion against potential external shocks. b. Reducing operating rates: Reducing operating rates refers to the adjustment of key policy rates set by the central bank. Lowering these rates can stimulate economic activity by making borrowing cheaper and encouraging investment and consumption. This measure may have been implemented to support economic growth, especially if there was a need for a boost after a period of tightening policies. It's important to note that the specific policy decisions and their timing are influenced by a wide range of economic factors, including inflation levels, exchange rate stability, economic growth, capital flows, and external trade dynamics. The central bank's actions are aimed at achieving macroeconomic stability and promoting sustainable economic development in the country.