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[Audio] Welcome to this course on the 2023 Banking Crisis and the critical factors that led to the collapse of banks like Silicon Valley Bank and First Republic Bank. In recent times, the banking industry has witnessed a surge in failures, prompting concerns and a closer examination of the underlying causes. These bank collapses represent a departure from the norm, as they are not connected to the subprime mortgage crisis of 2008 but are instead rooted in other critical issues, notably deficiencies in risk management and shortcomings in proactive supervision. One of the key drivers of these failures is the impact of rising interest rates, which has created significant liquidity challenges affecting both the asset and liability sides of banks' balance sheets. This shift in the interest rate landscape poses a formidable obstacle to banks worldwide, potentially resulting in reduced profitability and a wave of consolidation within the industry. In this course, we will delve into the intricacies of the 2023 Banking Crisis, starting with an exploration of the crisis in the United States. We will analyze the contributing factors, consequences, and lessons learned from these banking collapses, shedding light on the broader implications for the global banking sector. Join us as we embark on this journey to better understand the challenges and complexities that have shaken the banking world in 2023, and explore the strategies and solutions that can help navigate these turbulent waters successfully. Let's take a look at the 2023 Banking Crisis in the US first and then continue with its repercussions on Europe and Asia:.

[Audio] Let's start with The 2023 US Banking Crisis During a five-day period in March 2023, three small to mid-size U.S. banks experienced failures, which had significant repercussions, leading to a rapid decline in global bank stock prices. Regulators swiftly responded to prevent potential worldwide financial contagion. The first of these bank failures was Silicon Valley Bank, which encountered a bank run triggered by its sale of a Treasury bond portfolio at a substantial loss. This sale raised concerns among depositors about the bank's liquidity. The bonds had considerably decreased in value due to rising market interest rates, a result of the bank shifting its portfolio to longer-maturity bonds. SVB primarily served technology companies and affluent individuals with substantial deposits. However, deposits exceeding $250,000 were not insured by the Federal Deposit Insurance Corporation..

[Audio] Additionally, Silvergate Bank and Signature Bank, both heavily exposed to the cryptocurrency market, faced failure amid turbulence in that sector. In response to these bank failures, the three major U.S. federal bank regulators jointly announced their commitment to taking extraordinary measures to ensure the fulfillment of all deposits at Silicon Valley Bank and Signature Bank. The Federal Reserve established a Bank Term Funding Program offering loans of up to one year to eligible depository institutions that pledged qualifying assets as collateral. To mitigate the potential impact on other banks, global industry regulators, including the Federal Reserve, the Bank of Canada, Bank of England, Bank of Japan, European Central Bank, and Swiss National Bank, intervened to provide extraordinary liquidity. By March 16, substantial interbank transfers of funds were taking place to bolster bank balance sheets, and some analysts were speculating about the possibility of a broader U.S. banking crisis. By that date, various banks had borrowed approximately $150 billion through the Federal Reserve discount window liquidity facility..

[Audio] Following the SVB bank run, depositors rapidly began withdrawing funds from San Francisco-based First Republic Bank, which specialized in serving wealthy clients through private banking services. Similar to SVB, FIRST REPUBLIC BANK had a substantial amount of uninsured deposits exceeding $250,000, accounting for 68% of the bank's total at the end of 2022. However, this percentage had decreased to 27% by the end of March, as $100 billion in uninsured deposits were withdrawn. Despite receiving a $30 billion capital infusion from a consortium of major banks in March, FIRST REPUBLIC BANK continued to experience instability, leading to a sharp decline in its stock price. The FEDERAL DEPOSIT INSURANCE CORPORATION prepared to take FIRST REPUBLIC BANK into receivership and sought a buyer, eventually closing the bank on April 29. On May 1, the FEDERAL DEPOSIT INSURANCE CORPORATION announced that First Republic had been sold to JPMorgan Chase. During the preparatory phase, numerous banks across the United States had allocated their reserves into U.S. Treasury securities, which had been offering low interest rates for several years. However, as a response to the inflation surge from 2021 to 2023, the Federal Reserve initiated a series of interest rate hikes in 2022. Consequently, bond prices decreased, diminishing the market value of bank capital reserves. This led to some banks incurring unrealized losses. In an effort to maintain liquidity, Silicon Valley Bank chose to sell its bonds, resulting in significant realized losses..

[Audio] Furthermore, prior to and during the COVID-19 pandemic, several banks had exposure to the cryptocurrency market and cryptocurrency-related companies. The cryptocurrency bubble that had formed from 2020 to 2022 eventually burst in late 2022. In this challenging economic climate, three such banks either failed or were taken over by regulatory authorities. The first bank to face this fate was Silvergate Bank, which had a primary focus on cryptocurrency. On March 8, 2023, it announced its intention to wind down operations due to losses incurred in its loan portfolio. Two days later, Silicon Valley Bank, in a bid to raise capital, declared its intentions, triggering a bank run that led to its collapse and subsequent seizure by regulators on the same day. Shortly thereafter, on March 12, regulators shut down Signature Bank, a financial institution that had extensive dealings with cryptocurrency firms, citing systemic risks as the reason..

[Audio] The failures of First Republic Bank, Silicon Valley Bank, and Signature Bank marked the second, third, and fourth-largest bank collapses in U.S. history, respectively, second only to the collapse of Washington Mutual during the financial crisis of 2007 and 2008. In 2019, the Federal Reserve implemented the "Tailoring rules," which increased the minimum asset threshold from $50 billion to $100 billion and reduced the number of mandatory stress testing scenarios. This change allowed banks with total assets under $100 billion to adhere to less stringent liquidity standards. Signature Bank and First Republic Bank fell below the $100 billion total asset threshold set by the Federal Reserve's tailoring rules, thus benefiting from reduced liquidity regulation. Some individuals have raised questions regarding whether First Republic Bank would have experienced a bank run if regulatory standards similar to those in European Union countries had been in place in the United States..

[Audio] Now let's continue with the Liquidation of Silvergate Bank Silvergate Bank, originally established as a savings and loan association in California in 1988, transitioned into providing banking services to participants in the cryptocurrency market during the 2010s. The bank pursued regulatory approval in the summer of 2014 to engage with cryptocurrency firms. Its clientele expanded significantly, with a doubling of assets on its balance sheet in the 2017 fiscal year, reaching $1.9 billion. Silvergate achieved this growth by serving cryptocurrency exchanges and other businesses operating in the cryptocurrency sphere that struggled to secure financing from larger, more conservative banks. Despite its rapid expansion, the bank maintained a limited physical presence, operating only three branches, all situated in Southern California, as of 2018. By the fourth quarter of 2022, a substantial 90% of the bank's deposits had become related to cryptocurrency, with over $1 billion in deposits linked to Sam Bankman-Fried..

[Audio] In addition to providing conventional banking services to its cryptocurrency clients, the bank also functioned as a clearinghouse for its banking customers. It engaged in the resolution and settlement of transactions in real-time through its proprietary Silvergate Exchange Network. This network facilitated the transfer of U.S. dollar payments between clients of Silvergate without the need for interbank wire transfers. Numerous cryptocurrency companies chose to establish accounts with the bank to take advantage of Silvergate's efficient transaction settling process. Despite conducting the majority of its business with cryptocurrency entities, Silvergate maintained a relatively conservative investment portfolio. The company held significant positions in mortgage-backed securities and U.S. bonds. While these assets were generally considered dependable, with full payment expected upon maturity, they carried risks associated with fluctuations in interest rates. There existed an inverse relationship between the mark-to-market value of a bond and its yield..

[Audio] As interest rates increased during the inflation surge of 2021–2023, the mark-to-market value of these securities declined considerably. Typically, unrealized losses do not force a bank to cease operations, as they anticipate full payment under the original bond terms. However, when compelled to sell these securities at a lower mark-to-market price, these asset losses became realized, posing significant threats to the bank's ongoing viability. Silvergate experienced a bank run following the bankruptcy of F T X, resulting in a 68% reduction in deposits from cryptocurrency-related firms. The bank faced withdrawal requests exceeding $8 billion from its clients, surpassing its available cash reserves. To meet these withdrawal demands, Silvergate initiated the sale of its assets at a substantial loss, incurring a loss of $718 million solely in the fourth fiscal quarter of 2022. In a public statement, the bank asserted its solvency at the end of Q4 2022, with an asset sheet comprising $4.6 billion in cash and $5.6 billion in liquid debt securities, along with $3.8 billion in deposit obligations..

[Audio] In the ensuing months, Silvergate encountered severe financial constraints, selling assets at a loss and borrowing $3.6 billion from the Federal Home Loan Bank of San Francisco to maintain liquidity. In a regulatory filing on March 1, the bank acknowledged the risk of losing its well-capitalized bank status and potential challenges to its continued operation. Continuing to suffer losses from the sale of securities at mark-to-market prices, Silvergate issued a public notice on March 8, 2023, announcing its voluntary liquidation and the return of all deposited funds to their respective owners..

[Audio] Now let's continue with the The Fall of Silicon Valley Bank Historical Background Silicon Valley Bank was established as a commercial bank in 1983 and had its headquarters in Santa Clara, California. Until its eventual collapse, SVB ranked as the 16th largest bank in the United States, with a strong focus on serving clients primarily from the technology industry. A significant portion of U.S. venture capital-backed healthcare and technology companies received financing through SVB. Well-known companies like Airbnb, Cisco, Fitbit, Pinterest, and Block, Inc. were among its clients. In addition to financing venture-backed firms, SVB was recognized for providing private banking services, personal credit lines, and mortgages to tech entrepreneurs. According to the FEDERAL DEPOSIT INSURANCE CORPORATION, SVB held $209 billion in assets at the close of 2022..

[Audio] During the COVID-19 pandemic, SVB experienced an increase in its deposit holdings, corresponding to the growth in the tech sector. In 2021, the bank made strategic investments in long-term Treasury bonds to leverage the rising deposits. However, the market value of these bonds decreased as the Federal Reserve responded to the inflation surge of 2021–2023 by raising interest rates. Higher interest rates also resulted in increased borrowing costs across the economy, leading some SVB clients to withdraw funds to meet their liquidity requirements. To secure funds necessary to meet depositor withdrawals, SVB announced on March 8 that it had sold securities worth over US$21 billion, borrowed US$15 billion, and would conduct an emergency sale of some of its treasury stock to raise an additional US$2.25 billion. This announcement, combined with warnings from prominent Silicon Valley investors, triggered a bank run as customers withdrew funds totaling US$42 billion by the following day..

[Audio] On March 10, 2023, as a consequence of the bank run, the California Department of Financial Protection and Innovation took control of SVB and placed it under the management of the Federal Deposit Insurance Corporation. The Federal Deposit Insurance Corporation established a deposit insurance national bank, named the Deposit Insurance National Bank of Santa Clara, to handle insured deposits. It also declared its intention to commence payments for uninsured deposits in the following week, funded by proceeds from the sale of SVB assets. Approximately 89 percent of the bank's US$172 billion in deposit obligations exceeded the maximum insured amount protected by the Federal Deposit Insurance Corporation. Two days after the bank's failure, the Federal Deposit Insurance Corporation was granted exceptional authority by the Treasury, and in conjunction with other agencies, announced that all depositors would regain full access to their funds the next morning. An initial auction of SVB assets on the same day attracted only one bid, after PNC Financial Services and RBC Bank refrained from making offers..

[Audio] The FEDERAL DEPOSIT INSURANCE CORPORATION rejected this bid and plans to conduct a second auction to attract bids from major banks, now that the bank's systemic risk designation allows the FEDERAL DEPOSIT INSURANCE CORPORATION to insure all deposits. The bank later reopened as a newly organized bridge bank, Silicon Valley Bridge Bank, N.A. On March 26, 2023, the Federal Deposit Insurance corporation disclosed that First Citizens BancShares would acquire the commercial banking operations of SVB. As part of the deal, First Citizens brought around $56.5 billion in deposits and $72 billion of SVB's loans, discounted by $16.5 billion, while approximately $90 billion of SVB's securities remained in receivership. The FEDERAL DEPOSIT INSURANCE CORPORATION received approximately $500 million worth of equity appreciation rights associated with First Citizens' shares. SVB's 17 branches resumed operations under the First Citizens brand the next day, with all SVB depositors becoming depositors of First Citizens. SVB Private, initially intended for separate auction, was also acquired by First Citizens. The UK division of SVB was taken over by HSBC, which announced plans to rebrand the business as HSBC Innovation Banking..

[Audio] Now let's continue with The Collapse of Signature Bank Let's first look into the Historical Context of the Bank: Signature Bank was established in 2001 and had its headquarters in New York City. Initially, it began with assets around $250,000. Signature Bank provided loans to small businesses primarily in New York City and the surrounding metropolitan area. In 2007, the bank expanded its services into the multifamily residential rental housing market in the New York metropolitan area, although it gradually reduced its involvement in this sector during the 2010s. By 2019, over 40% of the bank's loan portfolio consisted of loans to multifamily homeowners in the New York metropolitan area, amounting to $15.8 billion out of the bank's total net loans of $38.9 billion..

[Audio] In 2018, Signature Bank initiated efforts to engage customers in the cryptocurrency industry, recruiting experts in the field with the objective of diversifying away from its reliance on real estate lending. The bank witnessed a substantial increase in deposits, with deposits growing from approximately $36.3 billion at the end of the 2018 fiscal year to $104 billion by August 2022. In that month, more than a quarter of the bank's deposits came from cryptocurrency-related companies. Its clientele in the cryptocurrency sector included prominent cryptocurrency exchange operators like Celsius Network and Bi-nance. By early 2023, Signature Bank had become the second-largest provider of banking services to the cryptocurrency industry, ranking only behind Silvergate Bank. In addition to conventional banking services for cryptocurrency clients, Signature Bank introduced its proprietary payment network, Signet, in 2019. This network allowed for real-time gross settlement of fund transfers using blockchain technology, eliminating the need for third parties or transaction fees. By the end of 2020, Signet had 740 clients using the network. It continued to expand, with Coinbase and the TrueUSD dollar-pegged stablecoin becoming integrated with Signet in 2022 and 2021, respectively..

[Audio] So what were the events in 2023? As cryptocurrency prices experienced significant declines in 2022, particularly following the collapse of the cryptocurrency exchange FTX, depositors at Signature Bank began withdrawing their deposits, amounting to billions of dollars. By the close of 2022, the bank's deposits had fallen to approximately $88.6 billion, down from the $106.1 billion held at the beginning of the year, when over a quarter of deposits were associated with digital asset-related entities. Towards the end of 2022, Signature Bank severed its business relationship with the cryptocurrency exchange Bi-nance in an effort to reduce its exposure to cryptocurrency market risks. On March 10, 2023, Signature Bank experienced a multi-billion dollar bank run, with depositors expressing concerns about the bank's vulnerability to cryptocurrency-related risks. Investor confidence in the bank was severely shaken, leading to a 23% decline in the bank's stock on that day. This marked the largest single-day drop in the bank's value in its 22-year history, coinciding with the collapse of Silicon Valley Bank. Two days after the collapse of Silicon Valley Bank, on March 12, 2023, regulators from the New York State Department of Financial Services closed Signature Bank. This event marked the third-largest banking collapse in U.S. history..

[Audio] The bank was unable to secure a sale or strengthen its financial position before the markets opened on Monday, causing customers to withdraw their deposits in favor of larger institutions. Shareholders of the bank incurred complete losses, and the Federal Deposit Insurance took control of the bank, establishing Signature Bridge Bank, to manage its assets for potential bidders. At the time of its collapse, Signature Bank was the subject of multiple ongoing federal investigations regarding the adequacy of its anti-money laundering measures. The U.S. Department of Justice had launched a criminal investigation to determine if the bank was conducting proper due diligence when opening new accounts and if it was effectively identifying and reporting potential criminal activity by its clients. Additionally, the U.S. Securities and Exchange Commission had initiated a separate civil investigation. On March 19, New York Community Bank agreed to purchase approximately $38.4 billion of Signature's assets for $2.7 billion. This transaction resulted in the rebranding of 40 Signature Bank branches as Flagstar Bank..

[Audio] Now lets move on to The Collapse of First Republic Bank What was the Historical Background of the bank? First Republic Bank headquartered in San Francisco, was a commercial bank that also offered wealth management services. It primarily served high-net-worth individuals and maintained a network of 93 offices spanning 11 states, with a strong presence in New York, California, Massachusetts, and Florida. At the close of 2022, it ranked as the 14th largest U.S. bank. FIRST REPUBLIC BANK , like other U.S. banks, came under intense scrutiny and pressure during the financial turmoil. On March 13, the bank's shares experienced a dramatic 62% decline. Confronted with significant liquidity challenges, FIRST REPUBLIC BANK received a lifeline on March 16, in the form of $30 billion in deposits from several major U.S. banks, in addition to a $70 billion financing facility provided by JPMorgan Chase. Eleven of the largest U.S. banks collaborated in this rescue effort, guided by Jamie Dimon..

[Audio] S&P Global took action on March 19, downgrading the credit rating of First Republic Bank by three notches, pushing it further into junk status. The rating agency expressed doubts about the private-sector rescue effort, suggesting that it might not address the substantial business, liquidity, funding, and profitability challenges the bank was facing.[78] In its quarterly report in April, the bank revealed a plunge in deposits of over $100 billion. This announcement triggered a more than 20% decline in the bank's share price. On April 28, the bank announced its intention to sell bonds and securities at a loss as part of a strategy to raise equity, while also initiating layoffs.[80] Additionally, several advisor teams departed from the bank during this period. The F D I C's consideration of seizing the bank was announced on the same day, causing its stock price to plummet by another 43% to $3.50. Following a further 42% drop in after-hours trading, the F D I C confirmed its imminent takeover of the bank. In 2023, the cumulative decrease in the stock price amounted to 97%. The following day, the F D I C approached various banks, including JPMorgan Chase, PNC, and Bank of America, informing them that they had until April 30 to submit bids for the acquisition of First Republic Bank. On the morning of May 1, the California Department of Financial Protection and Innovation announced the closure of FIRST REPUBLIC BANK , with its assets being sold to JPMorgan for $10.6 billion..

[Audio] Now let's ask ourselves the question: What were the Economic Ramifications? As depositors shifted their funds from smaller to larger banks, regional bank shares plummeted on Monday, March 13, marking a concerning trend. Following the collapses of SVB and Signature, Western Alliance Bancorporation shares dropped by 47%, while PacWest Bancorp saw a 21% decline, eventually recovering after a trading halt. Moody's responded by downgrading its outlook on the U.S. banking system to negative, citing the sector's rapid financial deterioration. Credit ratings for several regional banks, including Western Alliance and First Republic were also downgraded. The decline in regional bank stocks persisted even after First Republic's failure. On March 13, U.S. President Joe Biden reassured the public, emphasizing that government intervention was not a bailout and affirming the stability of the banking system..

[Audio] These initial bank failures sparked speculation on March 13 that the Federal Reserve might pause or halt rate hikes. Traders began adjusting their strategies, expecting fewer rate hikes than previously anticipated. Some financial experts suggested that the Bank Term Funding Program and the practice of finding buyers to cover all deposits might have effectively eliminated the F D I C's $250,000 deposit insurance limit. However, Treasury Secretary Janet Yellen clarified that any guarantee beyond that limit would require approval from the Biden administration and Federal regulators. The initial three bank failures and the subsequent pressure on other U.S. regional banks were projected to reduce available financing in the commercial real estate market, further slowing down commercial property development. The Federal Reserve's discount window liquidity facility saw approximately $150 billion in borrowing from various banks by March 16, surpassing the $12 billion provided by the government programme. As most of First Republic's long-term assets were in municipal bonds, it couldn't fully utilize the programme because these assets didn't qualify as eligible collateral..

[Audio] By March 16, substantial inter-bank fund flows were aimed at bolstering bank balance sheets, and numerous analysts began discussing a broader U.S. banking crisis. Many banks had invested their reserves in U.S. Treasury securities that had been offering low interest rates. However, as the Federal Reserve increased rates in 2022, bond prices declined, reducing the market value of bank capital reserves and leading some banks to sell bonds at significant losses, as new bond yields were considerably higher. On March 17, President Joe Biden stated that the banking crisis had subsided, though the New York Times noted that the March banking crisis continued to cast a shadow over the economy, reigniting fears of a recession. Business borrowing was expected to become more challenging, as many regional and community banks needed to curtail lending..

[Audio] Late on Sunday, the Federal Reserve and several other central banks announced substantial USD liquidity measures to stabilize market turmoil. In a coordinated effort to enhance liquidity provision through standing U.S. dollar swap lines, the U.S. Federal Reserve, Bank of Canada, Bank of Japan, European Central Bank, and Swiss National Bank decided to conduct daily U.S. dollar swap operations, deviating from their previous weekly schedule. PacWest's share price experienced a sharp drop on May 3 after the bank announced its consideration of strategic options, including a sale. On May 4, share trading was suspended as the sell-off led to a further 42% loss, impacting other U.S. regional banks like First Horizon, Metropolitan Bank, and Western Alliance. In May 2023, the F D I C proposed higher fees on approximately 113 of the largest banks to cover the costs of bailing out uninsured depositors..

[Audio] The 2023 Banking Crisis underscored the importance of risk management and proactive supervision in the banking industry. The impact of the crisis resulted in significant disruptions, leading to bank failures and global stock market declines. Moving forward, the industry must implement measures to enhance financial stability and ensure the fulfillment of all bank deposits. Now this concludes our part on the US Banking Crisis 2023. Let's continue now and let's look at the repercussions on the Asian and European financial system..

[Audio] So What was the impact on International Financial Markets? First let's look at Switzerland: Credit Suisse, previously designated as a "globally systemically important bank" by the Financial Stability Board, faced a tumultuous period following the 2008 financial crisis. It endured a series of scandals, litigations, fines, and financial losses associated with the 2007-2008 sub-prime mortgage crisis and other incidents. Often referred to as the "problem child" of the global banking system, Credit Suisse suffered reputational damage for many years in the aftermath of the 2008 financial crisis. However, in 2023, the failures of Silicon Valley Bank and Signature Bank sent shockwaves through foreign investors worldwide. These investors were highly vigilant for signs of contagion within the US banking system, triggering a global selloff in bank shares, including those of Credit Suisse, as investors sought safety. Shortly after the collapses of SVB and Signature Bank, Credit Suisse found itself in need of a capital injection from its largest shareholder, the Saudi National Bank. Unfortunately, regulatory restrictions prevented the largest shareholder from injecting additional capital, as banks were restricted from holding more than a 10% ownership stake in other banks..

[Audio] This limitation left Credit Suisse unable to swiftly raise additional equity capital. Combined with investor reluctance to engage in new investments following the recent failures of two US banks, Credit Suisse spiraled into a severe crisis. The rapid decline in Credit Suisse's share price heightened fears of its imminent collapse . Within a mere three days, depositors withdrew a substantial $35 billion from Credit Suisse. In response to this dire situation, the bank turned to the Swiss Central Bank for assistance in its survival. The Swiss Central Bank issued an ultimatum, directing Credit Suisse to either merge with its rival, UBS, or face potential oblivion. Eventually, Credit Suisse was acquired by UBS in a deal facilitated by the Swiss Central Bank. This episode of Credit Suisse's failure occurred during a period of rising interest rates in the US and globally, highlighting how such rate increases can swiftly expose hidden vulnerabilities within financial institutions and the broader financial system..

[Audio] By March 19, concerns about the international banking sector had escalated. On that day, Swiss bank UBS made an emergency acquisition of its smaller competitor, Credit Suisse, in a deal brokered by the Swiss government. Credit Suisse had previously reported its largest annual loss since the 2008 financial crisis, with clients rapidly withdrawing $147 billion in the fourth quarter of 2022. The bank also revealed "material weaknesses" in its financial reporting. Saudi National Bank, its largest investor, announced on March 15 that it would not provide additional support to Credit Suisse. Subsequently, the bank's share price plummeted by 25%, leading UBS to step in and purchase it. Some attributed Credit Suisse's downfall to the earlier bank failures in the United States, although this characterization was disputed by other analysts. The bank had faced years of multi-billion dollar losses, scandals, executive turnover, and a weak business strategy..

[Audio] European and Asian markets Late on Sunday, the Federal Reserve, along with several other central banks, announced substantial USD liquidity measures to stabilize the turbulent markets. In a coordinated effort to enhance liquidity through standing U.S. dollar swap lines, the U.S. Federal Reserve, Bank of Canada, Bank of Japan, European Central Bank , and Swiss National Bank initiated daily U.S. dollar swap operations, deviating from their previous weekly schedule. On March 21, The Business Times reported that Asian central banks were "unlikely to be greatly influenced by the banking crisis in the United States and Europe." However, Australia's central bank governors convened and indicated a potential pause in recent rate hikes. ABC News reported the challenge facing central banks: determining whether the banking turmoil posed a threat to the real economy or if inflation remained the greater concern..

[Audio] In Japan, the three major lenders—Mitsubishi UFJ Financial Group, Sumitomo Mitsui Financial Group, and Mizuho Financial Group—saw their share values decline by 10% to 12% due to market turmoil and their exposure to the bond market. Japan's central bank held a crisis meeting in mid-March as the Topix banks index fell by 17%. The decline was driven by fears related to the collapse of SVB and the risks associated with Japan's regional banking sector, partly due to exposure to U.S. interest rate hikes. The cost to insure against default on Deutsche Bank debt surged significantly on March 24, with the 5-year CDS for the bank's debt rising by 70%. On the same day, the ECB and other European central banks raised interest rates. The European STOXX 600 index experienced a roughly 4% drop, with Deutsche Bank shares falling over 14% at one point and ultimately closing the day with an 8% loss. The UK's banking index also fell by around 3%, with Barclays and Standard Chartered shares declining by approximately 6%, and NatWest dropping by 4%..

[Audio] Chinese banks experienced minimal negative effects, with Bloomberg News reporting that almost all of the top 166 performers during the market turmoil were in China. The stability of the Chinese banking system was underscored by the banking crisis in the U.S. and Europe. While China's recovery from the pandemic remained delicate, inflation remained subdued, and the People's Bank of China had adjusted interest rates at a slower pace compared to Western central banks. The financial system's turbulence led India's central bank to halt any further interest rate hikes on April 6, with Governor Shaktikanta Das stating that it was a "pause, not a pivot." A 25 basis point increase had been widely anticipated. Central banks in Australia, Canada, and Indonesia also paused any further increases. Although rising interest rates increased banks' returns on customer loans, the tighter financial conditions led to a downturn in equity funding. The S&P 500 bank index saw a 14% decline year to date in April, reflecting expectations of lower quarterly earnings for some U.S. banks. Effects on the secondary market were also anticipated. On April 11, the International Monetary Fund downgraded its 2023 global GDP growth forecast from 2.9% to 2.8%, citing high uncertainty and a shift in risks to the downside as long as the financial sector remained unsettled. This forecast marked a slowdown from 3.4% growth in 2022, with modest growth predicted to reach 3.0% in 2024. The International monetary fund had been revising its forecasts downward since spring 2022..

[Audio] In summary, what were the causes of this banking crisis? The 2023 banking crisis can be attributed to several key factors, with the COVID-19 pandemic and the Russia-Ukraine war playing pivotal roles in its onset. First there was The Impact of COVID-19 and the Russia-Ukraine War A comprehensive analysis of the 2023 banking crisis must commence by examining the profound influence of two major events: the COVID-19 pandemic and the Russia-Ukraine war. These events contributed to the crisis in specific ways: The COVID-19 pandemic played a significant role in the banking crisis by giving rise to a low-interest-rate environment and substantial fiscal stimulus measures. These measures were implemented to stimulate aggregate demand and facilitate economic recovery from the recession induced by the pandemic in 2020 and 2021 ..

[Audio] However, the consequence of these actions was an upsurge in inflation rates in various countries, including the United States. In response to mounting inflation, central banks contemplated raising interest rates to curb this trend. Simultaneously, the Russia-Ukraine war, which began in March 2022, exacerbated the crisis. It disrupted global supply chains and resulted in shortages of essential commodities like fuel, energy, and food, further intensifying inflation . Even before the war, advanced economies such as the United States and the euro area were grappling with inflation rates exceeding 5 percent. The war only exacerbated this situation, causing record-high inflation rates in the UK and the US. Second Inflation was escalating Between 2020 and mid-2023, the global economy witnessed a surge in inflation. This inflationary trend was attributed to a combination of factors, including the lingering effects of the COVID-19 pandemic, the Russian invasion of Ukraine, a worldwide energy crisis, pandemic-related lockdowns in China, and supply chain disruptions linked to the pandemic. These factors contributed to rising inflation rates in both advanced and emerging economies. Notably, advanced economies such as the UK and the US experienced historically high levels of inflation. For instance, the annual inflation rate in the US reached a staggering 9.1 percent in June 2022, marking the highest rate in four decades. Similarly, the UK faced double-digit inflation, with a rate of 10.1 percent recorded in July 2022, persisting above 10 percent from October 2022 to March 2023. The Russia-Ukraine War played a pivotal role in driving up energy and food prices globally, adding to the inflationary pressures..

[Audio] Thirdly, there was The Surge in Interest Rates With inflation on the rise, central banks confronted a critical decision: whether to prioritize economic growth for post-COVID recovery or to combat inflation by raising interest rates. In the years 2022 and 2023, many central banks across the globe opted for the latter approach, choosing to increase interest rates as a means of curbing inflation. These interest rate hikes, while effective in dampening inflation, had far-reaching consequences. The rise in interest rates translated to increased borrowing costs across various types of loans. It limited access to capital, curtailed household spending capacity, decreased demand for goods and services, slowed economic growth, and alleviated inflationary pressures. While raising interest rates represents a conventional method employed by central banks to counter inflation, the anticipation of these rate hikes triggered concerns. There were apprehensions that the rising interest rates might hinder banks' ability to service their debt and potentially push them into financial distress, especially those holding long-term bonds..

[Audio] In summary, the 2023 banking crisis was precipitated by a complex interplay of factors, including the impact of COVID-19, the Russia-Ukraine war, escalating inflation, and the consequential surge in interest rates. These elements collectively contributed to a challenging economic landscape, culminating in a banking crisis that took many by surprise, including the US Federal Reserve..