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We now have an international banking crisis.
The potential next phase is a global credit crunch, which could lead to another worldwide financial crisis, but regulators and central banks are pulling out all stops to prevent that from happening.
The ructions began on Friday last week when Silicon Valley Bank was unable to satisfy its customers' demands for deposits. An old-fashioned bank run leading to collapse.
New York's Signature Bank then failed over the weekend.
The US federal government, the Federal Reserve and regulators then scrambled to prevent widespread bank runs across the United States.
Their response included providing liquidity, or cheap money, to banks and providing assurances to all bank customers that their deposits were safe, even if they were above the insurance limit.
There was no catastrophic bank run in America earlier this week – so the response worked.
However, it was obviously a rushed response, and sent a clear message to international financial markets that the US authorities were blindsided by the two bank failures and were scrambling to contain any whiff of a financial contagion.
You could sense the anxiety in global financial markets.
Then overnight, the share price of global investment banking giant Credit Suisse crashed, causing panic in the bond market.
The question is, what happens next?
Significance of Credit Suisse crisis
Last year Credit Suisse credit default swaps surged in price.
In simple terms the financial markets were concerned about the investment bank's ability to fund itself and the rising risk it wouldn't be able to pay all its debts.
The bank had faced several scandals, but questions were also being asked about its profitability and the viability of its investment banking division.
Its share price had been falling consistently for many years, from 16.49 CHF in 2018 to 6.66 CHF by March 2020.
The stock price performed well during the pandemic but it fell heavily again in March 2021.
Fast forward to September 2022, a spike in its credit default swaps and a dramatic fall in its share price, and its CEO was forced to reassure the market the firm's capital base – or its cash buffers – was sound.
But the CEO also mentioned Switzerland's second largest bank was facing a "critical moment".
Over the past six months the share price has continued to fall and clients have pulled their money out of the business.
Crucially, overnight, the Saudi National Bank, which holds 9.88 per cent of Credit Suisse, said it would not buy more shares on regulatory grounds.
Here was a major equity holder, or owner, of the Swiss bank saying it was not investing another cent in Credit Suisse.
It added that it thought the business was in OK shape, but in terms of helping the business grow it was tapping out.
The timing of the comments from the Saudi bank was awful for the global banking system, given how on edge market participants had been.
Bond traders, especially, were shooting first and asking questions later.
Bond market turmoil
Make no mistake, the price movements in bond markets over the past week have been historic.
"These bond market moves are absolutely mind blowing," bond investor Angus Coote told the ABC.
"Two-year Treasuries (US government bonds) were yielding [returning] over 5 per cent a week ago.
"Now they are at 3.88 per cent."
Again, in simple terms, this is telling us that those dealing in the money market across the globe have in recent days being feverishly buying government bonds.
Why? Because in uncertain and volatile times they're considered relatively safe assets.
It makes sense too because these investments are backed by the government that issues them.
When interest rates rise, the price of bonds fall, and vice versa.
A falling bond market tells you interest rates are rising to cool the heat in an economy.
The reverse is also true — when bond prices soar, interest rates are plummeting, suggesting a major financial storm is ahead that will force central banks to reverse course on their recent rate hikes and start cutting.
"The market is telling us something very bad is coming," bond investor Angus Coote warned ominously.
This is not GFC 2.0
The next obvious question then is what could this storm look like?
Well, what we're seeing now is not a second instalment of the global financial crisis which kicked off in 2008.
The world's major banks were found to be – as Warren Buffett famously quipped – swimming naked when the tide went out.
A reformed regulatory regime, introduced as a direct result of that crisis, classifies the world's big investment banks as being "too big to fail", which means they're forced to hold vast amounts of cash or similarly safe reserves to survive a future financial crisis.
However, former US president Donald Trump ensured thousands of mid-tier regional US banks did not have to comply with these rules.
That means Silicon Valley Bank was given free rein to invest billions of dollars of its own deposits into US Treasuries without any kind of "insurance" in place to protect customers' money if the markets moved against the bank.
Sure enough, the markets did just that.
As interest rates rose, the value of Silicon Valley Bank's investment went south.
It became a problem when hundreds of small tech firms, who were also suffering from rising interest rates, went to withdraw cash from the bank.
Silicon Valley Bank had to sell its investments at a huge loss to meet its customers' demand.
It led to panic that in fact the bank couldn't meet its customers demands and hence a bank run ensued.
Again though, the regulatory response was swift.
The regulators literally shut the bank's doors and scrambled to find a way to ease customers' concerns.
The solution was to develop a fund, contributed to by the banking system itself, to pay out deposits.
Treasury secretary Janet Yellen was at pains to point out that it wasn't a taxpayer bailout. But where are banks going to get the money to fill this fund? Their customers of course.
The critical issue then becomes, at what point do regulators stop helping financial institutions when they're in trouble?
If the answer is never, we've actually now moved into an entirely different form of capitalism.
If the answer is when they decide it's too costly for them, then we could see a repeat of the GFC or even the widespread bank collapses of the Great Depression.
Government reassures Australians
So what about local implications?
Speaking on the collapse of Silicon Valley Bank, Treasurer Jim Chalmers said: "We are closely monitoring the situation and potential impacts for Australia caused by the collapse of the Silicon Valley Bank in the US."
"In seeking preliminary advice we are aware that some Australian firms have been impacted and we're working closely with our regulators as well as the tech sector to better understand the implications for the industry as the situation evolves," he said.
"The initial advice we have received from regulators is that any fallout for Australia's broader financial system is unlikely to be significant.
"Australians should be reassured that our institutions are solid, our banking sector is well-capitalised, and we're in a better position than most other nations to deal with the challenges we face in the global economy."
Stock losses on the Australian Securities Exchange at midday in the east today were heavy but largely contained.
However the past few days has pushed the share market as a whole just inches from a technical "correction", which is a peak-to-trough fall of 10 per cent or more.
Anyone in or approaching retirement with large superannuation balances would be acutely aware of this.
The other obvious implication from this banking crisis is that as banks look to recapitalise and shore up their finances, they may lend less.
This has implications for economic growth when the Australian economy is already looking shaky in the face of record-fast rate increases.
At a household level, though, if deep financial markets anxiety remains, or yet another major bank fails, the global financial system will become too vulnerable to collapse.
In that event, central banks across the world, including the Reserve Bank, would be forced to cut, rather than raise, interest rates.
Some big investment banks in the US are already forecasting the Federal Reserve may cut its cash rate by a full percentage point by the end of this year.
But what about inflation? Ah yes, inflation. That's a tricky one.
The last reading on inflation in the US shows it to be "sticky".
We simply don't want an environment where financial markets turmoil forces central banks to slash rates while inflation rips, but it's become a real possibility.
"Financial stability concerns are dominating everything at present and regulators and central banks will need to ensure that order is restored soon," ANZ Bank wrote this morning.
Well over a decade on, the fallout from the global financial crisis continues.
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