EXPLAINED: How America's banking crisis could hit consumers in Germany

What's going on?

In recent days, the United States has been gripped by a major crisis in its banking sector. It started with the collapse of Silicon Valley Bank (SBV) - a Californian institution that primarily offered financial services to tech start-ups - which was facing financial difficulties thanks to steep rises in interest rates that cut the value of its investments. 

Much like in the financial crash of 2008, SVB had been investing in mortgage-backed securities that were vulnerable to a sudden rise in interest rates. To make matters worse, most of its customers had deposited more than $250,000 into their accounts - taking them over the threshold for their assets to be protected by the US financial regulation. This made SVB incredibly vulnerable to a potential run on credit - which is exactly what transpired this week. 

As the SVB tried to raise additional capital, word spread of its financial issues, prompting a run on the bank as depositors rushed to withdraw their money. 

"In their actual business, losses would probably not have been so great that the bank would necessarily have had to be led into bankruptcy," explained Hans-Peter Burghof, an economist at Hohenheim University in Stuttgart. "My impression is that this is more a kind of coordination failure. If the large venture capital investors behind the investors had been coordinated, the bankruptcy could probably have been prevented."

The ripple effect that followed the collapse €200 billion institution also spread to other banks, including the New York-based Signature Bank, which also went bankrupt this week. Shares in major banks also plummeted in value as panic spread through the sector. As of Thursday, President Joe Biden was still battling to contain the contagion and prevent a fire sale that causes more banks to collapse. 

What does this have to do with Europe?

In the days following the implosion of Silicon Valley Bank in the US, a major player in the European banking sector - Credit Suisse - was also wracked by liquidity issues.

On Tuesday, the Swiss bank admitted to "material weaknesses" in its financial reporting over the past year, which caused investors to fear that the bank would have trouble raising extra capital.

In order to calm the markets and avoid a Lehman Brothers moment equivalent to events that sparked the financial crash of 2008, the Swiss National Bank has since announced plans to bail out Credit Suisse to the tune of more than €53 billion. 

But there are still fears that the issues with Credit Suisse and other banks could have wider consequences. 

Are we at the start of another financial crash?

Though bailouts of big banks seem reminiscent of the so-called "credit crunch" back in 2008, most economists aren't currently expecting a repeat of a crisis on that scale. 

However, Andrew Kennigham, chief European economist at Capital Economists, believes the issues with Credit Suisse are a "much bigger problem for the global economy" than the mid-sized American banks that collapsed.

That's because Credit Suisse has several subsidiaries outside Switzerland and also handles trades for hedge funds. "Credit Suisse is not just a Swiss problem, it's a global problem," Kenningham said, but he added that the Swiss bank's problems were "well known, so they are not a complete shock to investors or policymakers".

A lot depends on how customers - and, crucially, the markets - respond to news that major institutions like Suisse aren't quite as financially healthy as they appeared to be.  

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Could this affect my money?

That's not clear at the moment - but it's worth mentioning that your savings are generally safely stored at any regulated European bank. If you've deposited money into an account, you'll be entitled to compensation for that money in the event that a bank collapses. If the bank can't pay out the money itself, the compensation claim will be handled by the Federal Financial Supervision Authority (Bafin). 

According to Thomas Schlüter of the Association of German Banks, the state deposit insurance protects the credit balances of current accounts as well as registered savings bonds of up to €100,000 per depositor. In exceptional cases - i.e. if the deposit was related to a specific life event that took place no more than six months ago - banks will insure up to €500,000. This could be the sale of a privately used property, divorce, retirement, or termination of employment.

For people who have more money in the bank, there's also the Deposit Protection Fund run by the German Banking Association and protecting funds of up to €3.268 million per investor. 

As a rule, bank customers don't need to do anything to receive compensation. The compensation scheme receives the addresses and credit balances from the respective bank and will generally contact customers by themselves. According to Schlüter, the compensation is paid out relatively quickly and most people can expect to receive their money back within a week.

How can I check what's going on with my bank? 

If you're concerned about the financial health of your bank, there are a few relatively simple ways to find out more without having to trawl through complex financial statements.

One option is to check their credit rating and keep an eye out for any recent downgrades - which may not be a good sign. It's also worth making sure your bank is fully covered by financial regulations that protect your money in the event of a crash.

Experts are cautioning customers not to read too much into daily fluctuations in the stock market, however. While seeing your bank's share price plummet isn't a particularly nice feeling, it may not reflect the actual stability of your bank.

In fact, Matt Miskin, co-chief investment strategist at John Hancock Investment Management, pointed out on Bloomberg that many traders are simply pricing in the cost of additional regulation when buying shares in banks right now.

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In addition, there are some early signs that the economic landscape could be brightening a little, as the European Central Bank (ECB) revised down its forecasts for inflation this year and next.

Consumer prices are now expected to reach 5.3 percent in 2023 and 2.9 percent in 2024. It had previously forecast 6.3 percent for this year and 3.4 percent for 2024. 

This could be good news as central banks have been hiking interest rates in recent months to try and combat inflation - a situation that has hit the reserves of banks like Silicon Valley. 

"The problem is the same in the US, Europe, but also in other countries," economist Burghof told NTV on Thursday.

"We simply have a period of increased vulnerability for the financial system as a whole due to the policies of the central banks, which have kept interest rates down for too long and now have to raise them drastically because inflation is getting out of hand.

"That will pass. But as long as this phase lasts, you have to be very, very vigilant that nothing gets out of hand."

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