Is there a UK banking crisis 2023? Credit Suisse and Silicon Valley Bank issues explained - is your money safe

There have been a slew of bad headlines about the health of the global financial system over the last two weeks.

First, US financial institutions Silicon Valley Bank (SVB) and Signature Bank collapsed, sparking panic that a 2008-style banking crisis was on the way. These failures were soon followed by the slowburn demise of Credit Suisse, with the 167-year-old Swiss bank forced into an emergency buyout on Sunday (19 March) as its share price tumbled.

Its merger with fellow Swiss bank UBS averted a collapse that it was feared would cause an economic meltdown in Switzerland, and around the world. Shares in several major banks have been hit repeatedly in recent days as a result of poor confidence.

Here in the UK, the Bank of England and the government have been forced to make repeated assurances that the country’s financial system is “safe”. They have already facilitated the sale of SVB’s UK arm to London-based HSBC, although the capital is set to take a hit if job losses occur at Credit Suisse over the coming days and weeks.

So, is the UK sleepwalking into a banking crisis - and is your money safe?

Why are people concerned?

Concern about a potential banking crisis has stemmed from two related but slightly different stories.

The failures of medium-sized banks SVB and Signature Bank in the US prompted fears of runs on other banks - a ‘run’ being when people withdraw money or investment from a bank due to fears it could collapse, which then fuels further withdrawals and can become a self-fulfilling prophecy.

These two banks suffered runs because the government bonds they held had become devalued by rising interest rates, at the same time as customers were expecting better rates on savings and investments. Also, thanks to a relaxation of banking laws in the US during Donald Trump’s time in office, they did not have the financial backbone to ensure they would survive such a downturn in fortunes.

While these two banks were collapsing, Credit Suisse was already struggling to conduct a turnaround after having posted a record $7.9 billion (£6.4 billion) annual loss in February 2023. The Swiss bank’s share price had fallen sharply in recent years as a result of several major scandals, with the SVB and Signature collapses both piling extra pressure on it.

Despite securing a bailout and insisting it had the funds to weather the storm, Switzerland’s government felt compelled to step in and facilitate a takeover from rival Swiss bank UBS. Given Credit Suisse was considered to be one of the 30 or so banks around the world that are considered to be ‘systemically important’ (or in other words, too big to fail) by global banking watchdog the Financial Stability Board, the Swiss government said it felt compelled to act to avoid a meltdown both at home and abroad.

With the US bank collapses and Credit Suisse situations playing out, stock markets around the world have been taking hit after hit over the past week. It meant there were fears confidence in the global system was evaporating - a situation which had the potential to provoke a full-blown banking crisis, even for banks with healthy balance sheets.

As was seen during the last banking crisis in 2008, a collapse in the system would be likely to plunge the world into a recession. Stock markets would plummet, businesses would fail and housing markets would collapse.

Is a UK banking crisis on the cards?

While weaknesses have been found with the banking system in both the US and Europe, the UK appears to be insulated from the problems thanks to the strength of the country’s biggest banks and the post-2008 financial crisis laws.

Speaking to NationalWorld, professor of banking and applied economics at the University of Stirling, Robert Webb, explains that bank balance sheets are particularly strong because of high interest rates, which the Bank of England has brought in a bid to counter record inflation.

“As interest rates go up there’s more income. They’re getting more, and they’ve done nothing - they’ve not become more productive, they’ve not run faster, they’ve not helped more businesses, etc. They just get more money because interest rates go up,” he explains.

“However, as interest rates go up, their assets revalue, and they revalue down to take account of the increase in the interest rates. So therefore, there’s a mismatch between their liabilities - deposits and funding - and their assets.”

Professor Webb says this can create a cycle where gaps are created in the banks’ balance sheets. But thanks to the profits the bigger institutions are generating from interest rates, most are able to absorb these gaps.

He adds that the post-2008 UK reforms of the financial sector have also helped. “[The regulations] restrict what you’re doing on your balance sheet, and how you have to keep a prescribed amount of capital, and you have the countercyclical buffer [a cash cushion the Bank of England can force banks to have if it thinks risk is growing], and you have the ring-fencing and you have constant stress testing and scenario planning for this kind of thing. That’s all actually worked.”

This UK system contrasts with that in the US, where some of these post-2008 reforms were scrapped by Donald Trump during his presidency. He made the decision after medium-sized banks - including SVB - claimed they were not important to the overall health of the system.

But, while Susannah Streeter, head of money and markets at Hargreaves Lansdown,  says the risk to the banking system is considered to be “low”, issues related to bonds remain for smaller banks.

“Banks are still sitting on unrealised bond losses - this isn’t a problem if they can be held to term, which larger institutions should have little trouble doing. But if other smaller banks face a sharp withdrawal of deposits they may be forced to sell,” she explains.

In other words, if banks cannot absorb the short-term costs of higher interest rates, they could have to sell bonds at a loss - a situation that is what led to SVB’s downfall in the US. And with the Credit Suisse deal rendering some higher-risk bonds worthless, there is a lack of confidence in the system amongst some investors.

“This volatility has seen nervousness shoot up and larger institutions who lend to companies and homeowners may become more risk averse. They may prioritise beefing up capital cushions even further to withstand any further shocks emerging,” Ms Streeter says.

“If credit lines aren’t extended, or mortgages harder to come by, there will be repercussions for the wider economy, with growth likely to prove even more elusive and risks of recession rearing up again.”

Indeed, one of the main dangers to the UK system is speculation. This market force is not necessarily based on any facts, but can have a huge effect on banks.

“Everything in finance is to do with confidence, information and money. If the market sentiment goes against you - and it can happen so much faster now because of Twitter, Reddit, Instagram etc - information and misinformation can travel at lightning speed and can cause rapid panic,” professor Webb says.

He points to what happened at US gaming retailer GameStop, which saw its share price rocket as fans of the chain sought to take the markets on in 2021. “That was a bunch of people on Reddit all saying: ‘buy, buy, buy’. If everybody starts buying, it doesn’t matter that GameStop isn’t particularly profitable, or a very good business. If everybody starts buying, the price goes up and fundamentals have nothing to do with it.”

In the context of the current banking crisis, he says banks are healthy. But he adds: “If the village says that there’s an issue, there’s an issue.”

Fortunately, the market reaction so far this week has indicated the rot of speculation in the system may now have stopped. By Tuesday morning (21 March), the FTSE was rising - although Luke Hickmore, investment director at Abrdn, told the BBC it was too early to "call the all clear".

There is even an argument to say the turmoil seen over the past week has strengthened the banking system. Asked if she feels there is any risk of the international system sleepwalking into a crisis, Susannah Streeter says: “If any sleepwalking was going on, it’s been brought to an abrupt end as this series of events has shaken the sector and brought regulators and authorities into a high state of alert.”

Indeed, Reuters has reported that investors in the US expect the country’s regulators to bring in tougher rules for regional banks, which could include tighter lending standards and regulations that will force them to have enough money tucked away for scenarios like those we have just seen.

Here in the UK, professor Webb says he believes the crisis will “probably justify what was done in 2008” and would “go against” Jeremy Hunt’s Edinburgh Reforms. The chancellor’s plans for relaxing the laws governing the UK financial services sector in a bid to create economic growth were announced in December 2022. They included plans to scrap ring-fencing - a measure which forces banks to keep customer deposits separate from riskier parts of their business, like investment banking.

Professor Webb believes these reforms will now “be quietly forgotten” as a result of the SVB and Credit Suisse crises. “Usually you get a financial crisis every 9.3 years, the research shows. It’s been 15 years [since 2008]. Everything is working.”

Is your money safe in UK banks?

With all of the negative headlines doing the rounds, you might well be concerned about how safe your money is. But consumer rights expert Martyn James has urged people to “stay calm”.

He told NationalWorld: “In the UK we have a lot of consumer protections in place. This doesn’t mean businesses can’t fail but the regulator, the FCA, has introduced a wide range of measures to ensure that banks have enough ‘liquidity’ (the ability to have enough money on hand to get them through difficult situations) for moments just like these.

“The Financial Services Compensation Scheme (FSCS) was set up in 2001 and provides a safety net if regulated financial firms go under. The FSCS is funded by a levy that financial businesses have to pay. Though the FSCS is there to compensate people if a financial institution collapses, they can also consider some complaints about businesses that have gone bust too.

“There are limits on what the FSCS can pay out though. So, for example, compensation limits for banks, building societies and credit unions are set at £85,000 per person, per account. This rises to £170,000 for joint accounts. The FSCS covers other financial organisations too, from investments to insurance.”

For anyone with a lot of cash stored in savings accounts, Mr James urged people to split this money across “a range of accounts”. He said: “There are lots of great savings rates available online at the moment. However, I’d also recommend that you check the small print before you hand over your cash.

“A business must be regulated in the UK to be covered by the FSCS. So, don’t assume. Check your documents which will state (usually in the small print at the bottom or on their website) that the firm is regulated by the FSC and falls within the remit of the Financial Ombudsman Service and FSCS.”

Another fear stemming from the crisis is that banks could become much more cautious about who they lend money to. Martyn James urged prospective homebuyers or people seeking to remortgage to speak to a broker or their lender to remain abreast of their options.