In late March 2023, Silicon Valley Bank and Signature Bank, the go-to lenders for tech startups, dramatically collapsed, leaving customers and investors in shock. The failure of SVB is the largest banking collapse since the 2008 financial crisis.
However, this news paled in comparison to news from Switzerland, that Swiss bank UBS Group AG (UBS) bought rival Credit Suisse Group AG for three billion CHF (about £2.7 billion) in March to stabilise the global banking system and prevent the latter bank from collapsing. How could such a thing happen? In this article, we explain what leads to a financial institution imploding and evaluate whether any other banks are at risk of failing soon.
How do banks collapse?
The main cause of a bank going bust is its investors and customers getting wind of serious problems and panic that their money isn’t safe. This can lead to shares plummeting and customers withdrawing their money. The bank can’t meet its payments, and the Regulators must step in.
An example of the above process in action is the consequences of a rumour in late 2022 that Credit Suisse was about to fail. This resulted in customers withdrawing about $US119 billion in funds in the last quarter of the year. The bank tried to borrow $US54 billion to shore up its liquidity.
However, its main backer, Saudi National Bank, refused to comply because of regulatory barriers. The fall of SVB and Signature Bank, both due to panic withdrawals, sent shivers through the international banking sector, which turned out to be the death keel for Credit Suisse. Regulators rushed to orchestrate and approve its merger with USB to avoid a worldwide financial crisis.
What happens to my money if a bank collapses?
A bank collapse isn’t like an ordinary business falling into insolvency, as seen in the case of Credit Suisse. Rather the impact of such an event can reverberate across the globe. Therefore, governments quickly move in and shore up any financial institution in financial trouble as swiftly as possible through bailouts.
This is what happened in the 2008 financial crisis. However, some banks can’t be rescued, for example, Lehman Brothers. If a financial institution falls into bankruptcy, its assets are typically sold to other banks or building societies (this includes mortgages and other loans).
How much money does a bank guarantee if it collapses?
Fortunately, if you hold money with an authorised bank, credit union, or building society which collapses, the Financial Services Compensation Scheme (FSCS) will automatically compensate you up to £85,000 per person. This rises to £170,000 for joint accounts. The scheme is funded by a levy that all regulated financial institutions must pay.
Companies are separate legal entities; therefore, their deposits up to £85,000 are also usually protected. Sole traders are only entitled to one claim - up to £85,000. As an exception, business partnerships are entitled to make two separate claims (but only one claim, not one per partner). A complete list of what can be claimed can be found here.
Are UK banks in danger of collapsing?
Following the Credit Suisse rescue, the Bank of England offered a reassuring statement that the UK banking system was "well capitalised and funded and remains safe and sound". Credit Suisse’s financial difficulties didn’t come with no warning, and it had suffered a series of crises and scandals, including accusations of money laundering.
In the case of SVB and Signature Bank, both these institutions were adversely affected by the recent falls in cryptocurrency, and when depositors rushed to withdraw their money, the banks’ balance sheets were not robust enough to cope.
How can I protect my business funds from a bank collapse?
The first thing you can do to protect your business capital is keep your personal and business accounts in separate financial institutions. In addition, make sure that you don’t hold more than £85,000 in any one bank, as this is the maximum amount you can be compensated, regardless of how much money was in your account when the bank failed.
although no one likes reading the small print when opening a bank account or purchasing a financial product, it’s important to do so to ensure that the financial institution you are a customer of is regulated by the Financial Conduct Authority (FCA) and your deposits are covered by the FSCS scheme. If you have any doubts, the FSCS website lists all the institutions covered by its deposit protection scheme.
Get legal assistance from LawBite
A bank collapse can have far-reaching consequences, not just for customers and investors but also for the global financial system. It’s crucial to understand how banks collapse and what happens to your money in such an event. However, the good news is that the UK banking system is deemed safe and sound, and customers can take certain measures to protect their funds, such as keeping their personal and business accounts in separate institutions and ensuring their deposits are covered by the FSCS scheme.
If you require legal assistance concerning banking law or with a financial or commercial matter, LawBite can offer you expert support and guidance. To find out more book a free 15 minute call with one of our expert commercial lawyers, or call us on 020 3808 8314.