After a difficult year 2022 for the whole economy, 2023 does not look better.
In this first quarter of 2023, we are witnessing several banking crises.
In Europe, banks have been put to the test due to the financial crisis. Credit Suisse, a Zurich-based bank, was taken over by UBS after experiencing serious setbacks that sparked panic in the banking sector.
We also have the bankruptcy of several American banks such as: Silvergate Bank, Silicon Valley Bank and Signature Bank in March 2023.
The bailout of Credit Suisse and Silicon Valley Bank customers casts the shadow of a new financial crisis.
These banking crises are none other than the consequences of the increase in the Fed's key rates since 2022 to fight against inflation.
A banking crisis has always had repercussions on the financial markets, it leads to a drop in confidence in the traditional banking system, in financial transactions.
Investors who do not feel safe with banks will seek alternative means of wealth storage such as: Gold, government bonds, commodities and even digital gold. As the latter is not considered by the majority as a safe haven because of its high volatility, it will only serve as a diversification asset.
Banks are major players in the stock market and a banking crisis has more negative than positive impact on the economy and the stock market.
When a bank fails it is a bad sign for consumers and customers of other banks. We are witnessing a Bank Run.
A bank run is a situation where a large number of customers of a bank or other financial institution withdraw their deposits at the same time for fear of the creditworthiness of the bank. The more people withdraw their funds, the greater the likelihood of default, which in turn may encourage more people to withdraw their deposits.
Bank runs occur when many people start withdrawing from a bank because they fear the institution is running out of money. A bank run is usually the result of panic rather than outright insolvency. However, a fear-triggered bank run can push a bank into actual insolvency.
With already a recession, facing a liquidity problem for banks, companies and investors will also be in difficulty and will arise the problem of:
- Slowdown in economic activity: The access of companies and individuals to financing to invest or develop activities or consume becomes more difficult. This will create a domino effect: Business bankruptcy, rising unemployment, falling stock market assets, falling prices of goods and services which can lead to long-term economic stagnation.
