A series of bank collapses in the US and Europe have sent shockwaves into the banking sector in recent days, but how does the current meltdown affect you?
Most of us will remember only too well the financial crisis of 2007-2008, which saw a run on Northern Rock and the collapse of investment bank Lehman Brothers, and will be understandably worried that we might see a rerun of these events in the UK.
Here, we explain what’s happening in the banking sector now, and what it means for your savings and investments.
How did the current banking turmoil start?
Earlier this month, Silicon Valley Bank, the tech-lender and America’s 16th largest bank, collapsed suddenly, with its demise blamed on a series of steep interest rate increases to curb inflation. SVB invested heavily in bonds that lost value as interest rates rose. When its customers wanted to draw on their deposits, SVB simply didn’t have the cash available to pay them. This meant it had to sell bonds at hefty losses, prompting fears about liquidity which triggered a run on the bank.
Commercial lender Signature Bank failed around 48-hours after SVB’s collapse, with New York Community Bank at the weekend agreeing to buy a significant part of it in a $2.7 billion (£2.2 billion) deal. A third company, Silvergate Capital liquidated its bank last week too. Silvergate and Signature were the two main banks for crypto companies, whilst many crypto start-ups and venture capital firms were customers of Silicon Valley Bank.
California-based First Republic has also been hit by liquidity fears, with a group of big US banks injecting £30 billion into it to try to save it from collapse.
Issues have spread to Europe as well. Credit Suisse, which received an emergency loan from Switzerland’s central bank last week, was purchased by UBS at the weekend in a government-backed deal designed to avert the bank’s collapse.
There are few similarities between SVB and Credit Suisse, however, especially given SVB’s heavy investment in technology stocks, but like any bank, they both depend on investor confidence to succeed.
Credit Suisse, which was in the process of restructuring, has suffered all sorts of problems and issues in recent years which have damaged sentiment towards it, including alleged misconduct, money laundering and tax evasion, and losing several CEOs and chairmen.
Why didn’t the UBS takeover of Credit Suisse reassure markets?
Markets failed to be soothed by the UBS takeover, partly due to the fact that the terms of the deal included a requirement by the Swiss financial regulator to write down $17.3 billion of Credit Suisse bonds to zero.
The bonds affected are ‘contingent convertible’ bonds, which are high-yield investments that are essentially a kind of cross between a stock and a bond. They only become convertible into equity if a pre-specified trigger event occurs, such as the issuer getting into trouble, as has happened in this case.
The write-down of Credit Suisse’s bonds has sparked nervousness about this type of bond more generally and has triggered a sell-off in other bank debt, which in turn has hit share prices.
Is my money safe?
Governments have promised to do whatever it takes to avert the crisis from escalating, with the Bank of England providing reassurance that the UK banking system is well-capitalised and funded, and therefore “remains safe and sound.”
It’s extremely unlikely that we’ll see another Northern Rock occur in the UK, but if the worst were to happen, there is a safety net in place if you have savings. Provided you don’t have more than £85,000 with any one bank or building society, you will be protected by the Financial Services Compensation Scheme (FSCS), so your money won’t be at risk of disappearing. You can find out more about how your savings are protected in our article Are my savings safe?
Even in the 2007-2008 financial crisis, which impacted not just Northern Rock by several banks in the UK, no depositors lost money, even those with balances higher than £85,000. It’s in a government’s best interest to ensure that the banking system doesn’t fail, so they will do everything in their power to prevent this from happening, though there are of course no guarantees beyond the FSCS.
There was speculation earlier this week that current events may result in central banks pausing on further interest rates for now, to try stabilise markets and avoid a recession. However, following a surprise jump in inflation to 10.4% in the 12 months to February, up from 10.1% in January, the Bank of England’s Monetary Policy Committee on Thursday voted on whether to raise the base rate from 4% to 4.25%, the eleventh consecutive increase since December 2021.
What should I do if the value of my investments has plummeted?
Seeing the value of your pension or other investments suddenly fall dramatically in value is always a huge shock, especially if you’re planning to retire soon.
It may be easier said than done when everything seems so volatile, but try not to panic. Cashing in your investments when markets are falling will mean you turn paper losses into real ones, and miss out on any potential recovery in the months and years to come.
Recent turbulence explains why investing is only suitable for those who can afford to leave their money untouched for at least five years, but preferably much longer, as this gives you time to ride out stock market ups and downs.
It’s a good idea to regularly review your portfolio carefully, to make sure that you aren’t over-exposed to one particular sector or geographical area. Having a well-balanced portfolio so you can diversify your risks across different investments can help smooth out your investment journey. Be realistic about the returns you are aiming for too, and don’t expect gains every year. Find out more about managing market volatility in our guide Four ways to weather stock market storms.
If you want personal recommendations about where to invest your retirement savings, you’ll need to seek professional financial advice. You can find a local financial advisor on VouchedFor or Unbiased, or for more information, check out our guides on How to find the right financial advisor for you or How to get advice on your pension.
If you’re thinking about getting independent financial advice, financial services company Fidelius is offering Rest Less members a free initial consultation with an independent financial advisor to chat about your finances, where you are now, and where you want to go.
There’s no obligation, but if they feel you’d benefit from paid financial advice, they’ll go over how that works and the charges involved. Fidelius is rated 4.7/5 from over 1,000 reviews on VouchedFor, the review site for financial advisors.