Understanding the Details of the Global Banking Crisis

It is said that a stork wanted to kiss its young, but it put out its eye. That is exactly what the Federal Reserve (the US Central Bank) did – and is doing – as it raised interest rates in an unprecedented way within a strict monetary policy to contain inflation, but it caused the bankruptcy of a number of banks. Foremost among them is Silicon Valley (Silicon Valley SVB), after massive withdrawals of deposits.

Bankruptcy sparked terror in the global financial markets and stock exchanges, many stocks fell and the value of bonds declined, and reinforced fears of an economic recession.

This coincided with cases of major banks acquiring competing banks to calm the situation, as is the case with the Swiss bank “UBS” and the Swiss bank “Credit Suisse”.

Al Jazeera Net presents 10 terms that help understand the crisis of global banks.

1- The US Federal Reserve System
The US Federal Reserve is the central bank of the United States of America, headquartered in Washington, D.C., and chaired by Jerome Powell. The Federal Reserve is the most powerful financial institution in the world.

The Federal Reserve was established by Congress on December 23, 1913, and it is responsible for the country’s financial policy, maintaining stability and the national currency, securing money and controlling interest rates, and it also plays the role of savior for banks or the last resort by lending them during crises.

The world is affected by the decisions of the US Central Bank, and this is evident when it decides to lower or raise the interest rate, as the money of investors in the world flows to emerging economies in search of profit, and vice versa.

Recently, the US Federal Reserve raised the interest rate by 25% basis points following 4 consecutive increases of 75 points, bringing the benchmark interest rate to a range of 4.75% to 5%, the highest level since 2007, that is, before the global financial crisis.

2- Monetary Policy
Monetary policy is a major component of macroeconomic policies. It means a set of measures adopted by central banks to influence liquidity levels in the markets and loans granted by banks to achieve some macroeconomic goals, the most important of which is ensuring price stability, stimulating growth and supporting job opportunities.

There are two types of monetary policy adopted by central banks:

1- Expansionary monetary policy “Quantitative Easing”: In the event of an economic recession, the central bank works to increase the levels of the money supply (purchase of securities / bonds), and reduce interest rates to encourage the banking sector to further expand in granting loans. To finance investments and projects, and then increase the levels of domestic product, and provide job opportunities.

2- Deflationary monetary policy (Quantitative Tightening): In cases of economic prosperity and the emergence of inflationary pressures, the central bank works to reduce the levels of the money supply (selling securities), and raise interest rates to urge the banking sector to reduce the levels of granting loans to absorb inflation.

3- Interest rate
The interest rate is the rate paid by the central bank on commercial bank deposits, whether it is an overnight investment or for a month or more.

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This rate is an indication of the interest rates of commercial banks, which should not be less than the rate of the central bank.

The interest rate helps the central bank to control the supply of money in circulation by changing this rate up and down over the medium term.

Raising interest means curbing borrowing, and then reducing the liquidity ratio in the market, which leads to lowering the price inflation rate.

As for reducing interest, it is a decision that is taken when the state sees a significant slowdown in growth rates, so it begins to reduce interest rates successively until liquidity is pumped at sufficient rates that encourage higher production and consumption, and with it growth rates rise until the stage of recovery is reached.

4- Inflation
It is the increasing rise in the prices of goods and services, whether this rise is due to an increase in the amount of money circulating in the market in a way that makes it greater than the volume of available goods or vice versa, that is, it is caused by an increase in production in excess of aggregate demand, or due to an increase in production costs.

We can distinguish between price inflation, which means an excessive rise in prices, and between income inflation, which means a rise in cash incomes, such as wage inflation and profit inflation, and cost inflation, which means an increase in costs, and monetary inflation is added to this list, i.e. excessive issuance of currency.

Inflation is the opposite of deflation, which means a general decline in prices over a specific period, both of which, at certain levels, constitute a threat to economies.

To adjust inflation levels, countries rely on fiscal and monetary policies. With regard to fiscal policy, inflation can be addressed by curbing government spending and increasing taxes. As for monetary policy, the most famous of these is reducing the money supply in the markets by raising interest rates by the central bank to reduce demand, and vice versa; When an economic downturn occurs, government spending is increased and taxes and interest rates are lowered to stimulate demand.

5- Economic recession
An economic recession is a decline in a country’s gross domestic product or – in other words – a record of negative growth in the gross domestic product (economic contraction) for at least two consecutive quarters, and most of the recessions that the world witnessed were short-term.

The economic recession is usually due to the superiority of production over consumption, which leads to stagnation of goods and then lower prices, thus making it difficult for producers to sell stocks, followed by a decline in the rate of production.

The effects of the recession can be seen in the significant decline in economic activity for several months, which reflects a decrease in the gross domestic product and the real income of the state, in an increase in unemployment, a decrease in industrial production, a decrease in retail sales, a turmoil in stock markets, and a decline in investments.

The American economy has experienced recession on more than 30 occasions since 1854.

And if the recession continues for years, it turns into an “economic depression,” as happened with the “Great Depression” in 1929, when the recession lasted for 10 years.

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Bond economic terms

6- Bonds
A bond is defined as a financial commitment under which the issuer or borrower undertakes to return to the creditor or lender the borrowed value – or what is known as the face value of the bond – in addition to periodic interest on the principal amount during the commitment period.

Bonds are also defined as debt instruments (securities) that oblige the borrower (the issuer) to pay fixed amounts (called interest) to the lender, over successive periods.

The borrower from issuing bonds aims to cover the budget deficit or to finance projects and production lines.

Borrowers resort to bonds because they are medium and long-term financing tools that provide them with protection from fluctuations in interest rates in the short term, and they are less expensive than bank loans.

US Treasury Bonds are the most common and important type, because these bonds are issued by the US Treasury, which gives them more security than any other bonds.

This type of bond has different “maturity” periods, which is the time it will take for the government to repay the loan on your investment.

The maturity date is between 2 years, 5 years, or even 30 years, and once the maturity date ends, the government pays back your initial loan (principal amount) in full.

7- Stock Market
A stock is a unit of ownership in a company. If you own a share of stock in a particular company, you own a part of that company and become a shareholder.

The shareholder in the company has the right to share the success of the company – that is, profits and dividends, for example – but on the other hand, he is exposed to the company’s failures, such as losses and bankruptcy.

This type of securities is traded in the stock market, which is a form of financial market, in which shares of listed companies are bought and sold, according to specific conditions and mechanisms set by the relevant authorities.

People who want to buy or sell shares meet in the stock market, and they are called “traders,” and the intermediaries through whom buying and selling operations are executed.

The buying and selling of stocks is called “stock trading”. With the technical development over the past years, electronic trading platforms have been developed for this purpose.

8- Deposits
A deposit is defined as the money that is placed with a person for the purpose of safekeeping, or it is a contract in which the “depositary” undertakes to preserve the thing, and then return it at the agreed upon date, to its owner, the “depositary”.

A bank deposit is a bank’s obligation to a customer for any amount of money deposited in its credit account; He may ask the bank to pay it to him at any time.

The customer may also be the one who deposited the money, or it was deposited in his credit account by virtue of a transfer from the bank to him, or by payment from other sources.

The purpose of the deposit is to invest for the bank and achieve a return for the depositor.

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There are several types of deposits, including:

Fixed deposits

A type of time deposit, and it is distinguished by the fact that withdrawals on it are conditional on a specific period, such as with a warning of a week, two weeks, or a month, for example, and this date is agreed upon between the bank and the depositor.

The interest rate usually increases with the longer the deposit stays with the bank.

Deposits on demand

They are deposits that the depositor can withdraw in whole or in part at any time without the need for prior notification to the deposited bank.

Banks accept such deposits, but do not pay any interest on them, and are similar to current accounts and savings accounts.

Bankruptcy economic terms

9- Bankruptcy
Bankruptcy is a legal state that includes the liquidation of the assets of a bankrupt person or a bankrupt business, and includes the distribution of remaining cash reserves to the creditors of the bankrupt. This situation usually results when the bankrupt is unable to pay his debts at the moment they become due.

Bankruptcy in the laws regulating business is when the company – small or large – announces that it is unable to fulfill its obligations to creditors.

Bankruptcy is a situation in which the bank is unable to fulfill its payment obligations to depositors or other creditors and, accordingly, this bank becomes unable to continue its business.

As for the states, they are not bankrupt, but rather unable to pay. It is not valid to talk about bankruptcy with regard to countries, as is the case with individuals and companies, as there is no court or international body that can seize the property of countries and sell them in order to pay the dues of creditors.

It is also not permissible under any circumstances in international law, due to the sovereignty enjoyed by states that is forbidden to be infringed upon.

10- Acquisition
Acquisition is the financial and administrative control of one company over the commercial activity of another company by purchasing all or a large part of the shares.

In other words, an acquisition is every action whereby a person (or a company) owns directly or indirectly all or part of the capital of a company to obtain a majority of the voting rights in it by purchasing all or part of the shares of the company or by public offer or in any way other according to legislation.

The acquisition does not result in the expiration of the legal personality of the company that is being acquired or infringement of its rights and obligations towards third parties.

As for merger, it is the joining of one or more companies to another existing company with the disappearance of the legal personality of the merged company, and it is called – in this case – the merger by way of consolidation, or the merging of two or more companies into a new company with the disappearance of the legal personality of the companies concerned and it is called – in this case – the merger. By mixing. (Al-Jazeera)

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