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What is financial contagion and is this phenomenon at work today?

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After the recent banking crises in the United States and Switzerland, the threat of global financial contagion seems to have passed, but investors are still not convinced of the strength of the global economy.

Financial contagion occurs when an adverse event in one economy or market causes similar events to spread to other, sometimes unrelated, economies or markets on a regional, national or global scale.

there Federal Deposit Insurance Corporation (FDIC, an independent US government agency whose main responsibility is to guarantee bank deposits made in the US up to $250,000, editor’s note) and the US Federal Reserve intervened to avoid financial contagion in the US by guaranteeing certain deposits and launching a one-year lending scheme to help banks That found itself with devalued securities, such as Treasuries, after the collapse of Silvergate Bank, Silicon Valley Bank (SVB) and Signature Bank earlier this month.

Without the Treasury’s involvement, the frustrated investors and depositors who pulled out in droves from financial institutions could have caused bank failures in the US, even if they were not related to the first three banks that went bust.

And while no other US bank has collapsed, investors seem far from confident. Despite repeated assurances that the US economy is in good shape, the stock market plunged several times last week as panicked investors sold off their stocks.

Swiss regulators have arranged for the Union Bank of Switzerland (UBS) to take over Credit Suisse this weekend to avoid financial contagion globally, after shares of the Swiss bank 21% dive After discovering “fundamental weaknesses” in its 2021 and 2022 financial reports.

SVB collapsed on March 10 after declaring a loss $1.8 billion After selling the treasury bills, which were devalued two days ago. Signature Bank went bankrupt on March 12 after panicked investors tried to withdraw billions of dollars the same day SVB went bankrupt. Although investors began pulling out of Credit Suisse three days after Signature’s collapse, the Swiss bank is not a victim of a global financial contagion: investors were reacting to the bank’s discovery of “significant weaknesses” in its 2021 and 2022 reports, instead. Panic about global economic instability. Either way, the bank’s impressive global reach prompted Swiss regulators to step in to prevent the bank from failing. Credit to the Swiss National Bank $54 billion At Credit Suisse, making The share price increased by 33%. Before the bank takeover over the weekend.

Translated article from the American magazine Forbes – Author: Emily Washburn

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