The US Federal Reserve on Wednesday raised interest rates another 25 basis points, despite fears about the impact of higher rates on the global banking system. 

This latest increase by the United States central bank brings the country’s interest rates to a range of 4.75% to 5% as the country continues to battle inflation.

The Fed’s decision follows weeks of uncertainty regarding the global banking system following the collapse of two American banks, Silicon Valley Bank (SVB) and Signature Bank and the emergency buyout of Swiz bank, Credit Suisse.

Speaking on Taking Speaking with Kalilah Reynolds, CEO of Profit Jumpstarter Keisha Bailey explained that the issue with the American banks started in 2020.

“Back in 2020 during the pandemic, tech companies became very favourable. Everybody was starting tech companies and a lot of capital was going into tech,” she said. 

“So Silicon Valley Bank being the bank for tech companies had a very good problem. They had a lot of deposits,” she added.

Bailey explained that SVB decided to invest the funds in US treasury bills. However, when the Fed began aggressively and rapidly increasing interest rates in 2022, the value of the treasury bills fell. 

That created a cash flow problem for SVB, as Bailey noted that the average depositor at the bank had $2-3 million in their accounts.

“So SVB was losing money on the treasury bills but they still had depositors to pay,” she said.

Word of the bank’s situation spread causing panic among investors who withdrew US$43 billion from the bank in two days, resulting in the US’s largest bank failure since 2008.

Bailey said SVB failure sparked a chain reaction in the US and overseas.

“The same thing with the treasury bills started to affect Signature Bank which is the bank for the crypto firms. And 2022 was already a rough year for crypto firms so there was another run there,” she explained.

The news from the US then rattled Switzerland’s second-largest bank, Credit Suisse, with investors starting to pull money from that bank as well. 

“Credit Suisse has been struggling for years. They’ve been hit with a lot of lawsuits and have had a lot of internal struggles. So, they have always been under pressure and have been struggling… but this is a large bank and has been identified one of the global systemic banks,” Bailey said.

However, Switzerland’s biggest bank, UBS, bought its rival in an emergency deal to stop a global financial market meltdown.

UBS reportedly paid US$3.25 billion for Credit Suisse, about 60% less than the bank was worth. The US government also announced that it will repay depositors who lost money in SVB and Signature Bank. 

Fed chair Jerome Powell said the Fed had considered pausing rates in the days leading up to the decision but had decided that the banking crisis was under control and that more rate rises were needed to bring down the US’s inflation. 

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