It's been a week of major bank failures, emergency talks, and central banks offering credit lifelines to halt the looming banking crisis.
Even if central banks and politicians say the situation is now stable, all this banking panic has left many people wondering: is this another financial crisis?
So, let’s see exactly how bad it is, and what it could mean for you.
What is happening to banks and why are people talking about it?
Global banks just had their worst week since 2008.
It all started with the surprising bank runs and collapses of Silicon Valley Bank and Signature Bank that prompted the Fed to take moves to prevent further contagion throughout the U.S. banking sector.
Meanwhile, Credit Suisse found itself in a downward spiral last week, despite a $50 billion emergency lifeline from the Swiss National Bank, and its customers started shifting their funds elsewhere. Finally, a takeover deal for $3.2 billion (€2.99 billion), by rival Swiss bank UBS was agreed upon Sunday with the help of the Swiss National Bank.
While the U.S. banks and Credit Suisse faced different challenges, all three (and the banking sector in general) were affected by one common factor: sharply rising interest rates.
💡How do rising rates affect the banking sector?
To curb rising consumer prices, central banks such as the U.S. Federal Reserve or the European Central Bank have raised borrowing costs around the world. That has come as a shock after years of very low interest rates.
Banks holding government bonds, which drop in value when interest rates go up, have suddenly found their assets worth much less.
That has affected the whole banking sector, making banks (especially smaller ones) more vulnerable, thus creating the butterfly effect we’re seeing now affecting the global banking sector.
Is my money safe in a bank?
If your bank actually collapses, there’s usually a deposit protection in place.
- The European Union safeguards deposits of up to €100,000, preventing mass withdrawals in case of bank failure.
- In the U.K., that's £85,000 per person (or £170,000 in a joint account). So, if you have £85,000 in one bank and £85,000 in another, it's all safe if both go out of business, under the Financial Services Compensation Scheme.
- In the U.S., the standard deposit insurance coverage limit is $250,000 per person.
Thanks to this (theoretical) protection, major banks are unlikely to be unable to give your money back. However, as we’ve seen in the past, when hit by a crisis, banks have a tendency to freeze withdrawals to avoid bank runs, effectively making you unable to access your own money.
So, even though the current banking crisis doesn't see the total trust breakdown that characterized the 2008 financial crisis, some regulators may still tighten up the rules even more, and banks might take fewer loans.
Moreover, this could further threaten the global economy, already reeling from high inflation and spillover effects of the war in Ukraine.
How to protect yourself from the banking crisis?
Of course, watching the banking sector fall into turmoil is unnerving, especially if you keep most of your life savings in a bank.
But there are a few things you can do to protect yourself from a possible bank failure:
- Split up your accounts: rather than tying up yourself with one bank, you could keep some of your money and loans with a couple of different institutions.
- Set up an emergency fund: you should keep one-third of your monthly expenses as an emergency fund - even if you can't, at least put something aside. Whenever you have to dip into the emergency fund, don’t forget to top it up.
- Turn to safe haven investments such as gold and precious metals: as a result of the banking crisis, it seems that investors are reminded once again of the benefits of physical assets as they reshuffle their wealth and look for alternatives outside the banking system.
💡How is storing gold with GOLD AVENUE different than keeping money in a bank?
While both are a form of saving, the gold you buy and store with GOLD AVENUE is not only insured and 100% allocated, meaning it belongs entirely to you, but it is also kept out of our balance sheet. This means that even in the unlikely event that something were to happen to GOLD AVENUE, your gold would still remain yours, and you would keep full access to it!
While U.S. and European bank benchmark indices have lost 20% and 13%, respectively, since last Wednesday, safe haven investments have been on the rise.
As the chart below shows, the gold price rose above $2,000 an ounce on Monday for the first time in a year as banking panic persisted even after a deal to buy Credit Suisse Group AG.
Concerns about contagion among U.S. regional banks have made investors think that the Fed will slow its rate hike pace, which usually means gold prices are going up. Even if there’s no pullback in the rate increases, either scenario seems good for gold.
“The Fed will have to choose between higher inflation OR a recession/financial instability and either outcome is bullish for gold, which puts all time highs ($2070/oz) in play.” Nicky Shiels, Metals Strategist at MKS PAMP
So, if you don’t want to keep all your savings in the bank, gold is a good place to be, especially with the continuing threat of further bank runs and financial instability.
Now might be the time to buy gold!