Global Banking Crisis: What's Next After Credit Suisse's Collapse and US Bank Failures?

The global banking crisis has taken center stage as Credit Suisse became the latest bank to be taken over by a rival in a rapid, orchestrated deal by Swiss authorities. This development has left financial institutions and regulators scrambling to prevent the spread of the crisis. In the US, the banking crisis began nearly two weeks ago with the sudden collapses of Silicon Valley Bank and Signature Bank over a three-day span, which sent shockwaves through the global banking system.

Regional banks with similar profiles to SVB have also been affected, with First Republic Bank, PacWest, and Western Alliance having teetered on the brink over the past week. Customers have pulled tens of billions of dollars in cash from the smaller banks and placed them with bigger institutions that are better capitalized.

To pay customers their withdrawals, regional banks have scrambled to access enough cash. This has led to banks borrowing a record $153 billion from the Fed’s discount window last week – a last-resort option for banks to gain quick access to cash. The good news is that the banks that borrowed from the Fed’s discount window did not borrow on secondary credit terms – emergency, overnight loans that help deeply troubled banks keep the lights on. The bad news is that the strain on the financial system shows that banks may be resistant to lend money, adding more scrutiny to the creditworthiness of borrowers. This means fewer mortgages and less money flowing to businesses, which could slow the global economy and potentially lead to a recession.

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To calm fears before there is a system-wide deposit withdrawal, there are growing calls for US authorities to guarantee all customer deposits, regardless of whether they’re insured or uninsured. Moody’s on Friday said there is a “high likelihood” that federal regulators could invoke a systemic risk exception to protect all uninsured depositors at First Republic. The solution would be for customers to stop withdrawing deposits. If regulators insured all deposits of all sizes, similar to what happened to Silicon Valley Bank and Signature customers after those banks failed, that could give customers confidence that their money is safe with regional banks.

The coordinated action of central banks from around the world on Sunday represents the first indication that the banking crisis could have long-lasting and damaging effects on the global economy. Their action boosted the movement of US dollars through the global financial system to keep loans flowing to households and businesses and support the world’s major economies. With a looming debt ceiling crisis and intense scrutiny about using taxpayer money to fund anything close to resembling a bailout, the Biden administration would almost certainly prefer an organic solution to the crisis.

There is some evidence that this may be starting to happen. Western Alliance, which reported a large amount of withdrawals last week, and Charles Schwab, which earlier in the week said average margin balances were down 28% at the end of February compared to February , both sought to reassure customers and investors by saying deposits were relatively steady over the past few days and they remained sufficiently liquid – which means they have enough cash to continue to fund their operations. A US official told CNN that deposits at small and midsize American banks have stabilized in recent days, with outflows either slowing, stopping, or in some cases reversing.

The banking crisis may have long-lasting and damaging effects on the global economy, and its resolution would require customers to stop withdrawing deposits. The strain on the financial system shows that banks may be resistant to lend money, adding more scrutiny to the creditworthiness of borrowers, meaning fewer mortgages and less money flowing to businesses. Central banks’ coordinated action to boost the movement of US dollars through the global financial system is the first indication that the crisis could have long-lasting effects on the global economy. Customers’ confidence in the banking system needs to be restored through regulators guaranteeing all deposits of all sizes.