The banking meltdown over the past week has left us with more questions than answers. The stunning collapse of two American banks and the loss of investor confidence in Credit Suisse led to wild market swings and put Wall Street on edge.
During CNN’s primetime special, “Bank Bust: Inside the Collapse of SVB,” experts weighed in on how to best understand what’s happening in a rapidly developing and confusing environment for financial institutions.
Here are five questions that experts answered Wednesday night.
Former Treasury Secretary Larry Summers told CNN that despite scary headlines, now is not the time for consumers to panic.
“I don’t think this is a time for panic or alarm,” Summers said. “This is not 2008, where people needed to be worried about where they could get their money…It absolutely is not that.”
“Americans’ money is safe,” he said.
CNN’s chief business correspondent Christine Romans says this is not a repeat of the 2008 global financial crisis, because banks aren’t carrying toxic assets.
“They’re not allowed to anymore,” Romans explained. “They don’t have all that garbage, that junk on their balance sheets anymore. They have to have better capital set aside, and the big banks have to undergo stress tests.”
However, Romans noted that smaller banks like SVB don’t face quite the same regulatory scrutiny as their larger peers.
“The verdict is out on the controversy about whether some of these smaller banks were allowed to not partake in all of the … regulations, and maybe that left them more exposed,” Romans said.
Some context: Those regulations passed in the wake of the Great Recession laid out stricter rules for the banking industry. But small and mid-sized banks — those with assets below $250 billion, like SVB — were exempted from some of the rigorous capital requirements applied to larger institutions, and from the obligation to undergo tests of their ability to withstand financial stress by the Federal Reserve each year.
After Silicon Valley Bank failed on Friday, its customers were filled with fear. But by Monday, they could breathe a sigh of relief — the Treasury Department, the Federal Reserve and the Federal Deposit Insurance Corporation had said over the weekend that each customer would be made whole, even beyond the $250,000 insured by the FDIC.
While it was welcome news for account holders, the extraordinary move raised questions for some, who wondered why the FDIC bent its rules for SVB and its customers.
“I do think there’s a little bit of moral hazard here,” said Lynette Khalfani-Cox, CEO of AskTheMoneyCoach.com, referring to the idea that banks will take on more risk if they think they’ll get bailed out.
As to why the FDIC made the decision it did? The Federal government didn’t want SVB’s failure to “have a domino effect,” Khalfani-Cox said. “Federal regulators deemed them to be in the category of ‘systemic risk,’ so they granted an exemption.”
You may hear economists and market analysts reference “moral hazard” when discussing the past weekend’s rescue of two US banks, Silicon Valley Bank and Signature.
“Moral hazard” is somewhat academic shorthand for the idea that banks (or other entities) will take on more risk if they believe that they will ultimately be bailed out.
For example, some argue that SVB should have been allowed to fail — that the pain of the fallout would outweigh the downsides of customers losing their money and startups going out of business. Of course, others note that the risk of letting the 16th-largest US bank collapse, and potentially letting its tech industry customers also fail, could have far-reaching and potentially devastating consequences.
With all the panic in the market, it gets tougher to purchase a home, particularly if government regulators like the Federal Reserve crack down on banks in the wake of SVB’s collapse. The Fed has also been on a historic rate-hiking regime to keep inflation in check, and most economists expect that to continue.
“I think realistically, from what we’ve heard from the Fed, interest rates likely will continue to rise,” said Vivian Tu, a former JPMorgan trader.
“On top of that, I think a lot of folks are feeling very concerned about, ‘Hey, if I’m saving up for a down payment, is a bank a safe place to put that money?’”