We’ve been here before. A major bank collapses after putting the proverbial mortgage on risky investments. The shockwaves rattle markets, trigger the bailout/rescue takeover of another major banking institution, and have lots of people talking about another banking crisis.
The events of 2008 are still fresh enough in the memory to make it understandable that the collapse of Silicon Valley Bank, and the subsequent emergency rescue of Credit Suisse, has put the jitters up a lot of people.
Back then, the laissez-faire and some would say reckless approach to cheap lending the banking sector had for many years revelled in came back to bite it, and the entire global economy, hard. A sharp rise in defaults on subprime mortgages in the US brought down some giants of the banking world. The domino effect caused by these collapses led to a global recession, wholesale business closures and the famous ‘credit crunch’ which, temporarily at least, saw commercial lending severely curtailed.
Are we on the precipice of something similar? Plenty of analysts have been rushing around trying to dampen down the flames of panic, pointing out that we’re not seeing anything like the tidal wave of bank runs and bailouts we saw in 2008.
But the doomsayers point out, equally correctly, that these things have to start somewhere. First SVB, then Credit Suisse. Then it’s Deutsche Bank suffering a slump in share value, triggering a widespread sell-off in European bank shares. As the World Economic Forum points out, the fact that other banks in the US have already had to be propped up by outside investment has largely gone under the radar. How much of this is about systemic problems across banking as a whole, and when does it all snowball?
And as the WEF also points out, this is against a backdrop of corporate defaults on debt across the board being at their highest levels since 2009. It’s tough out there.
None of this should be taken lightly. What happens in the banking sector does trickle down to affect business as a whole. It could lead to borrowing costs going up further still, at a time when businesses are already creaking under inflationary pressures. It could make credit tough to get full stop, hampering investment plans. The worst case scenario is that a bank you do business with collapses and takes your assets with it.
Is there anything you can do to prepare for the worst? Businesses have been operating in less than ideal economic circumstances for a long time now, and most of the steps you can take to prepare for a possible banking crisis are things you’ll have seen advised in the wake of the pandemic and the cost of living crisis. Make sure you’re on top of your company finances, cut costs where possible without undermining the strength of the business, and get your cash flow in order.
Any kind of buffer you can create to have spare cash in the business should things turn seriously sour is helpful. And consider spreading your liquid assets around different accounts – just in case. With interest rates likely to continue to rise, it is a good time to take advice on restructuring loans. And if your medium to long-term strategy depends on investment, start looking into alternative sources of capital beyond bank loans.