US, European banking systems are at serious risk due to rising interest rates

 The crisis will worsen and may necessitate a coordinated worldwide effort like we saw in 2008.

More important for the world financial system was the demise of Credit Suisse, a 167-year-old firm, than the demise of Lehman Brothers in the 2008 global financial crisis.

Lehman fell as a result of losses on subpar investments and a lack of capital.

On the other hand, Credit Suisse was reliable and had enough capital. It failed as a result of a run on its deposits brought on by depositors' anxiety and terror.

The bank had outflows of more than $122 billion in just three months, despite receiving a $50 billion bailout from the Swiss central bank.

Regulators ultimately had no choice but to compel the merger with UBS and assist UBS with $100 billion in liquidity.

A few weeks prior, three banks that had experienced a run on deposits, Silicon Valley Bank, Signature Bank, and Silvergate, required the US government to pledge assistance for their accounts.

These trends are much riskier than the 2008 financial crisis because they demonstrate how fragile market sentiment is—even a relatively stable bank with full government support could experience a run.

Although the recent weeks have been stable, there are worries that other institutions, like the German Deutsche Bank, could experience a similar catastrophe.

First Republic Bank lost $70 billion in deposits or 40% of all deposits, and PacWest lost a fifth of all deposits.

Both banks have asked the US Fed for liquidity. In the last two weeks, US small banks have seen a cumulative outflow of $190 billion, while $23 billion has left large banks.

Money is being transferred out of banks and into money market mutual funds.

What’s causing this?

The increase in US interest rates is the main cause of the banking crisis.

Up until this week, the weak developing economies that were suffering from a capital flight in favor of the US currency were the main victims of the tightening cycle in the US.

Current unforeseen and unanticipated casualties include the US and Western banking systems. The majority of US banks had bought US government bonds with their deposit holdings.

The values of these bonds have significantly decreased due to the steep increase in interest rates. Thus, the bank is forced to sell these bonds at a loss when depositors request their money back.

Their other investments, made in formerly booming industries like venture capital, private equity, and real estate, are illiquid and currently valued at amounts significantly less than what they originally paid for them.

When Silicon Valley Bank was involved, this is what took place. They were compelled to sell their holdings of US bonds, and as a result, the bank effectively became insolvent and suffered losses of $21 billion.

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The head of the US Federal Deposit Insurance Corporation (FDIC) claims that US banks have unrealized losses of more than $620 billion as a result of investments in poor-yielding government bonds.

US interest rates, which have not yet peaked and are anticipated to rise by at least another 25 basis points to 5.25 percent, will exacerbate the situation.

The banking system will suffer further losses as a result.

There are some similarities between the GameStop saga and the bank run. News and anxieties spread swiftly in the digital age via social media, and clients can withdraw their deposits much more easily thanks to digital banking.

Some attribute the run on Silicon Valley Bank to a single US venture capital fund.

Some are drawing comparisons between the current crisis and the Savings and Loans Bank crisis of the 1980s, which resulted in a $125 billion loss and the demise of numerous small US banks.

Zombie banks were produced, unable to lend money since they had to maintain liquidity.

Similar to the current crisis, regional US banks that have received emergency money from the Fed will eventually have to halt lending, which will cause a significant slowdown in the economy.

I worry that the situation will worsen and may necessitate a similar worldwide coordinated response as in 2008.

Tragically, geopolitics is ultimately responsible for the increase in inflation that has sparked this cycle of interest rate increases.

High energy costs and the US-China trade war's effects on global supply networks are the main causes of inflation.

The inflation caused by the supply chain is more resistant to changes in monetary policy. Structural inflation is caused by deglobalization. Politics would eventually be affected by high inflation, as is already clear by the rallies in France and the strikes in the UK.

Another effect of the Swiss financial crisis is that private banking deposits may leave Switzerland and go to other regional banks in Singapore, Hong Kong, and the Middle East.

The $122 billion in deposits that Credit Suisse withdrew must have gone to bigger US banks like JP Morgan and Citi as well as international institutions like HSBC.

The government's policy options between reducing inflation and averting a severe recession become increasingly challenging, and the results appear to be very bleak, with US elections taking place the next year.