Panic days in the stock market. Banks are under pressure and many are wondering if our money is really safe. But to answer that question, we need to take a step back to understand what’s happening to financial markets these days.
Let’s start with the first shock: the United States. There’s a small regional bank here, Silicon Valley Bank. The name is evocative: it is the main source of investment for technology start-ups. It is loved by new Californian pioneers, but its raison d’etre is the root cause of problems: too many non-repayable loans and hence bankruptcy. It is the first thorn in the credit system to show that something has changed after the rise in interest rates.
Let’s jump into Switzerland: Let the Arab subsidiary of Credit Suisse – a major investment bank – be known to be unwilling to inject new liquidity. Panic ensues and the Swiss giant is saved thanks to a forced marriage with Ubs. The Lehman Brothers specter is waving in many ways: It was 2008, the contagion effect between banks plunged the entire world into financial collapse.
It doesn’t even take time to understand what’s going on before Deutsche Bank is attacked in Germany: once again, for the dowry of loans at risk of failing. “The European banking system is sound,” ECB chief Christine Lagarde has been repeating for days… and she’s not entirely wrong. After that dreadful 2008, Europe has strengthened the assets of the major European credit institutions by adopting stricter rules on banks.
However, it is impossible to predict the stock market. Fears translate into current-account actions: those with troublesome portfolios at the bank flock to move their deposits to the big banks, seeing them as safer and ultimately destabilizing the smaller banks. What if one of our perfect storm banks crashes?
Fear is, in a word, Bail. There is a real compromise hierarchy among creditors. Account holders first, bond holders second, and finally shareholders most vulnerable to bankruptcy risk. So how do you not fall into mass financial paranoia? The good news is that all amounts deposited in current accounts under 100,000 euros are always protected from the storm. Then you have to respect some golden rules.
First: DI-VER-SI-FI-CA-RE. This means don’t put all your money in one piggy bank. Rule 2: Forget the movie “seat for two” and don’t panic. The risk may only be to magnify the losses. Anyone who visits the exchanges often knows that waiting to see their long-term fruition is sometimes the best choice. After all, if one of the biggest Italian traders like Andrea Unger told us – unflinchingly – “it’s extremely unlikely that one generation will have two banking crises”, then perhaps it’s better to remain calm.
Source: Today IT
Roy Brown is a renowned economist and author at The Nation View. He has a deep understanding of the global economy and its intricacies. He writes about a wide range of economic topics, including monetary policy, fiscal policy, international trade, and labor markets.
