The news of the closure of two banks, the share prices of banks around the world fell.

In the space of three days, two banks collapsed in the United States. Even the US President gave a strong message about this and said that those who are responsible for this, strict action will be taken against them. Everything that can be done will be done to save the banking sector and the economy as a whole from major losses.

But nothing seems to be getting water for now. Due to the closure of Silicon Valley Bank and Signature Bank, the share prices of various banks around the world fell on Tuesday. Shares of Santander in Spain and Commerz Bank in Germany fell by more than 10 percent on Monday morning.

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However, the biggest losses have been caused by US banks. Yesterday, the market capitalization of banks in that country decreased by 90 billion or 9 billion dollars. With this, their market capitalization has decreased by 190 billion or 19 billion dollars in the last four days.

Among the US banks, regional banks have suffered the most losses. Shares of First Republic Bank fell more than 60 percent. Even the news that new investments are coming to that bank did not reassure investors. However, Moody’s, the credit rating agency, has a role in this case. Because, they are reviewing the credit rating of this bank.

Apart from this, Europe’s stock banking index fell by 5.7 percent and Credit Suisse fell by 9.6 percent. In Asia, Japan’s banking sub-index dotIBNKS dot fell 6.7 percent.

When this is the reality, another rumor has been created in the market. That is, amid this market uncertainty, the US central bank, the Federal Reserve, may exit the policy interest rate hike trend.

The Federal Reserve and other major central banks around the world have raised interest rates to fight inflation. However, the closure of Silicin Valley Bank is an example of the pressure it has placed on the financial system and markets around the world. The growth wheel has slowed due to increase in policy interest rates. The bank is now closing due to that shock. As a result, the matter has taken a serious form.

Investors feel that the risks to the banking sector are not over as the Federal Reserve continues to raise interest rates.

Rumors and bank collapses

Ben S. Bernanke, the former chairman of the Federal Reserve Bank of the United States, Douglas W. Diamond, a professor at the University of Chicago, and Philip H. Dybvig, a professor at the University of Washington, received the Nobel Prize in Economics last year for researching the banking and financial sector crisis.

The worst economic crisis in modern history was the Great Depression of the 1930s. 2022 Nobel Laureate Ben Bernanke researched that crisis. He showed that the economic crisis of the 1930s deepened and lasted as large numbers of depositors withdrew money from banks together (bank runs).

Bernanke said, SVB is a great example of a bank that can collapse just because of rumours.

When a large number of savers go to the bank to break their savings together, the rumor becomes practically real. Government can play the role of rescuer to avoid this dangerous situation. That is, to act as the government’s emergency banker for banks with deposit insurance.

In the case of SVB, the US regulator did just that.

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