Why we are having a banking crisis?


2023-04-26 11:38:56

Interest rates rose. For years banks booked low fixed-rate loans. They comprise 80% in France, 85% in UK and 90% in US. Banks now face losses on them. Loans at variable rates can charge more but risk a wave of defaults from borrowers.  

When inflation rises, savers take their money out of banks. In US, deposit outflows, which overall amounted to $98.4bn or 0.6% of the total, came from small banks, while there was an increase in deposits at larger rivals. In the eurozone, depositors have withdrawn €214bn over the past five months, or 1.5% of total deposits. Banks will need to rein in lending due to large deposit flight, Leading to a sizeable credit crunch.  

Government bonds is where banks park reserves. Bonds bought a year ago fell in value because they offer lower rates than those sold today. American banks had $620.4bn in unrealised losses on their bond-portfolios at the end of 2022. When a bank finds itself short of cash to meet deposit outflows it will sell these bonds, at a loss triggering a crisis.