Banking crisis expands to Europe

English Mar 20, 2023

Two days ago, several news sources documented that Credit Suisse was under immense stress following the failure of multiple US banks.

To try to contain the banking crisis and prevent Credit Suisse's financial problems from spreading to dozens of other businesses and causing a greater impact on the country, the Swiss National Bank agreed to step in with tens of billions of dollars in liquidity.

Just last week it was announced that First Republic Bank would receive $30 billion in deposits from 11 other banks.

In times of crisis, it is very important to observe how central banks will act. Before the bankruptcy of several banks, the Federal Reserve (US central bank) was struggling to restrict economic stimuli and fight inflation by raising interest rates. Rising interest rates directly reduced the value of variable income assets, such as stocks or cryptocurrencies.

After the collapse of the banks, it was confirmed that the Federal Reserve increased its balance sheet last week by almost US$ 300 billion, that is, it returned to stimulate the economy.

This increase in the balance sheet comes after a year of stimulus tightening, which has contracted Federal Reserve assets but now signals the turning point in strategy has been reached.

One of the biggest problems with this change in strategy is that the central bank did not manage to control the problem of high US inflation. Indeed, the Fed raised interest rates by 4.5% and wiped about $1 trillion off its balance sheet, but it never got inflation below 6%.

The agency is increasing its balance sheet because it has no choice but to lend money to the banks. Without this new injection of liquidity, many of the banks appear to be insolvent due to unrealized losses on long-term, low-yield debt.

It is not clear at this point how high inflation can go. The United States is responsible for the global reserve currency and has a responsibility to stabilize the value of its currency. Otherwise, it is to be expected that people will look for alternatives.

There is no doubt that many traditional money managers will point to gold or foreign currencies as a potential solution. However, a growing number of people across the globe are convinced that bitcoin will be the big winner.

The decentralized digital currency was built as a response to the last financial crisis and could prove to be the best asset to store value through global adoption through the current crisis.


Morel Hernandes

Writer passionate about politics, economics, blockchain and crypto-currencies.