Can someone explain the banking crisis to me like I am five?
I want to know if I got this right, because I am reading so many different versions of why the financial markets are jittery atm...
Most people are saying that the turbulence in the market is down to rising interest rates. Okay. Why, though? I understand for SVB they had jittery investors and so the bonds they invested in, when made liquid, meant that they couldn't cover all their liabilities(?), so went bankrupt.
Credit Suisse had structural problems.
The other banks were weirdo banks with crypto investments...
So what's going on, then? Is it just an issue of consumer confidence falling in the banks leading to deposits being withdrawn, leading to less liquidity? So, affecting mostly the commercial banks? The only connection I can make between interest rates and the current turbulence is how they affected SVB and then SVB fuelling a downwards spiral in confidence.
I would really appreciate if someone could explain or clarify what's going on!
Thank you :)
Edit: Also all the DB shit... Just seems like speculators being irrational to me? Idk, this almost seems like a speculative driven "crisis"... Please do inform if otherwise
bump? :)
This is a great question and we’re going to have to wait and see until the DB story unfolds. People will only know the answer until it’s too late.
Well hello there, 5-year-old! The 2008 financial crisis was a big problem that happened a long time ago, when many grown-ups didn't do a very good job of taking care of their money. You see, some of these grown-ups had too much money and wanted to make even more, so they took risks with their money that they shouldn't have taken. They made loans to people who couldn't pay them back, and they invested in things that were very risky.
Eventually, all of these bad decisions caught up with them, and the banks and other big companies started losing a lot of money. This made people worried about the future, so they stopped spending their money like they used to, and this made things even worse. Lots of people lost their jobs, and some even lost their homes. It was a really tough time for many families.
But, just like when we fall down and get hurt, we have to get back up and try again. The grown-ups in charge learned some important lessons from the crisis, and they made some changes to make sure it wouldn't happen again. They made new rules to make sure banks and other big companies didn't take too many risks, and they set up some safety nets to help people who were struggling.
So even though the crisis was a really tough time, we can learn from it and try to make things better in the future
Lol super patronizing but then you realize it’s exactly what OP asked for.
Goo-goo gaga, OP! Daddy is losing a lot of money (you know the gween paper in your piggy bank) because people were taking their gween paper out of his bank (basically a massive piggy bank hahah oink) all at once!
I wanted to know about the current financial sector turbulence rather than the GFC, but yeah, funny nontheless
Lmao I'm retarded so this was the perfect explanation for me
Can someone explain to me (in the case of DB) why their share price matters? Is it just a confidence thing?
^
DB is a big company that has lots of money. They lend money to people who want to buy things like homes or start businesses, and they sell little pieces of their company called "stocks" to other people.
Sometimes people get worried that DB might not have enough money to pay back all the money they owe to other people. When this happens, the people who own the stocks start to sell them really fast. This makes the price of the stocks go down a lot.
When the price of the stocks goes down, DB doesn't have as much money as they used to. They can't borrow more money or sell more stocks to make up for what they lost. This means they have to stop doing business, which is called "bankruptcy."
It's like when mommy and daddy have to buy lots of diapers for you, but they don't have enough money to buy more when they run out. They can't just keep borrowing money or selling things to make up for it, and they might have to stop buying more diapers. That's kind of what's happening to DB, but on a much bigger scale.
Does that make sense, little buddy?
Yea man thanks
When interest rates rise, bank assets decline and bank liabilities increase. This leads to insolvency. Banks are supposed to hedge against interest rate risk, but when interest rates are kept low for extended periods of time, they do the opposite: they chase yield by acquiring assets that are particularly sensitive to rising interest rates. The banks did this for a long time and then, without warning, inflation rose rapidly after the COVID recovery. Higher inflation and high rates of employment led to the FED's contractionary monetary policy (i.e., increasing yields). It's a similar situation to the 2006-2008 period leading up to the [previous] financial crisis.
Read slapped by the invisible hand and/or misunderstanding financial crises by Gary Gorton.
1) Inflation + exposure to crypto + borrowers (start-ups) defaulting + panic + deposits withdrawals = SVB and Signature Bank fall/bankruptcy
2) Panic + statement by major CS shareholder that they will not bring more equity no matter what hardships CS may face + shaky past reputation* and confidence in management + Swiss government taking preemptive measures to protect one of its most important national banks = CS fall/acquisition
3) Panic + deposits withdrawals + European Central Bank criticizing the Fed for funding US banks (similar effect to major CS shareholder statement) + neighbor bank falling (CS) = DB controversies
4) Professional investors selling banking stocks anticipating a market panic + amateur investors selling banking stocks because of bad news + anticipated lower earnings in the next financial results (because of the current crisis) = Bank stocks declining --> Non-investors (the majority) taking the stock prices as an indicator that banks are losing money/falling --> More panic.
Other points:
*A bank's main asset it's its reputation/trust. When their reputation/trust is shaky, so is their business. That's why panic (amplified by 2008 memories) plays a huge role in a banking crisis.
It comes down to banking 101 and maturity mismatch. Think about a bank’s balance sheet and how it makes money. When you deposit $100 in your bank account, that money doesn’t just sit in your account. The bank uses that to make a loan or buy other assets (e.g, bonds) that earn a higher interest rate than it pays on deposits. So its assets (loans, bonds, etc.) are generally long-term and illiquid and its liabilities (deposits) are generally short-term and liquid. Normally this is fine because not everyone is going to withdraw their deposits at the same time and depositors expect that the bank has enough cash on hand to meet demand. However, if depositors suspect the bank doesn’t have enough liquidity, there’s a run on the bank (i.e., everyone runs to the bank to withdraw their cash before it’s gone).
SVB was big in the tech and VC community. It took in a significant amount of deposits from tech companies over the past few years and invested those deposits in treasuries. Over the past year or so, deposit inflows slowed down due to the rout in tech/VC and deposit outflows increased due to inflation/higher costs. So it had to generate liquidity to meet increased deposit outflows. To do this, it sold some of the the treasuries it purchased. However, since interest rates have been rising, it sold at a significant loss (inverse relationship between price and yield for bonds). This sparked panic among its customers and led to a run on the bank.
The SVB situation drew attention to the banking sector broadly and specifically the regional banks. More specifically, the regional banks with wealthy customers and a high percentage of uninsured deposits (i.e., deposits above FDIC limit of $250k). So SVB, First Republic Bank, Signature Bank, etc.
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