A Possible Global Banking Crisis: Is it time to switch to DeFI?
What comes to your mind when you hear the word “Global Banking Crisis”? Does the event that transpires in 2008 come to your mind? Well, we could be in for a different ride in 2023 as some of the major banks worldwide faced tough challenges in their liquidity after a prosperous couple of years. So are we witnessing another Global Banking Crisis? And is it time to switch to DeFI?
The Storm after the Sunshine…..
The year was 2019 when a certain disease called the Coronavirus was about to spread globally and the Banking sector had a decade-long growth from the Great Recession. Fast forward 4 years from that time to 2023 with the Pandemic also over and the Banking sector is quietly facing a crisis that has caused trouble to some of the major players in its space. What happened between 2019 to 2023 was an unprecedented event that could benefit the banking sector.
If we look between 2020 and 2021 as the coronavirus pandemic was rising, many governments resort to deploying stimulus packages and relief programs to save the welfare of the people. In the US alone, two major stimulus packages were rolled out that combined inject more than $4.1 Trillion into the economy. This additional monetary stimulus will find its way into the banks somehow and in the end provide the banks with massive deposits.
One such Bank is SVB which saw a massive increase in deposits and 3x times its total assets in the space in less than a year. Other US Banks also saw a major increase in their deposits which amounted to more than 20% from its Pre — Pandemic figures. Not only that but also part of the massive stimulus package was the subsidies of interest rates on loans which should help banks maintain a healthy loan-to-deposit ratio throughout their operations.
These measures were deployed to ensure that people or institutions have enough liquidity to carry them through the challenging times of the pandemic but it also stands to benefit the banking sector in a lot of ways. The main source of revenue for the banking sector is the difference of interest charged between the deposits received by the banks and loans given out which is called a spread. Essentially the banking sector currently owns a huge amount of deposits which they can easily lend out and earn easy major profits from the expanding money supply.
Revenue of US Banks saw a record 90% increase to $279.1 Billion and the total marketing capitalization of the global banking sector also peaked in 2021 at $16 Trillion. This was followed by all-time highs in other investment instruments such as Stock and Digital Assets which were reached in November 2021. This all represents great news for the banking sector with profits and liquidity high as cash injections from those stimulus packages continue to flow to the bank.
Of Course, this sunshine will continue until they eventually fizzle away and dark clouds rise as the storm starts to brew. This storm came in various ways to the banking sector but “Tapering” by the FED seems to provide the biggest reason. As Inflation and the money supply continues to grow, the FED and government from different countries aim to raise interest rates to deter spending and roll back the money supply to a normal level.
This affects the banks in a major way as it also means that most of the liquidity will get drained either in the form of withdrawals or defaults due to a high-interest rate. These should not be a major factor for the big banks who have enough diversified portfolios to keep their liquidity healthy at all times but it does affect the medium to low-tier banks. One of those examples is again SVB which managed to collapse at the beginning of 2023 due to a bank run.
The question on everyone’s mind is are we heading to a global banking crisis? This panic was obviously set off due to the Collapse of SVB and Signature Bank in March but obviously, we are not quite there yet. What is clear is that we are not heading for a repeat of 2008 but the indicators do point out that the outlook for this year is not positive. While the total deposit growth continues to increase this year, profits of the global banking sector fell by more than 6% in 2022.
Credit Suisse is also a major bank that could follow the same fate as SVB if UBS has not stepped in to rescue and purchased its competitors. First Republic Bank also posted a loss of more than $102 Billion and saw its share price tank by more than 50% in a single day. The rescue package so far for the collapse of these major American banks has amounted to more than $400 Billion and could continue to climb as more banks tap out through these challenging times.
What is clear is this banking crisis has spread to other sectors such as the housing markets and auto industry, trickling a possible recession in many major countries. Some countries such as the USA, China, and Europe are inching closer to a recession while the situation is much worse in Argentina and Sri Lanka. All in all, the banking crisis that looms large in everyone’s mind will be a slow burn to its path of recovery and it is still unclear when will be its conclusion.
Is DeFI a better option?
It is quite strange that the DeFI space, which will be 15 years old in 2023, is always compared to its traditional counterparts which have been in existence for more than 100 years. Technically the DeFI space as a whole suffers from the same problem as TradFI which is an insane growth in 2021 but faces a liquidity crunch in 2022 as capital injection dries up. The Digital Asset and the NFT aren’t also spiking much optimism after their loss of more than 80% of their value.
What the people need right now is a haven that can protect their investments and also grow in value over time. Throughout this Stimulus era, as both banks and DeFI receive major capital injections from their depositors and investors, the question remains on how these financial institutions can manage the capital and provide returns not only for themselves but also for their depositors who desperately need that liquidity.
Throughout what is displayed the collapse going on in 2022 and 2023, shows that some of the financial institutions do know how to create profit but forget to do it sustainably. Most know how the display good ROE but forget how to employ proper risk management structure to ensure that the liquidity will continue to be healthy. This recession will put a test on who can perform better as their sustainability is being shaken up.
DeFI does have all the attributes of the blockchain technology that should propel them to be a potential for the future but if it wants to compete with TradFI, it needs to rework a lot of the lost direction going on in the space. 2023 will be a major turning point for every financial sector and the institutions that survive and thrive during these challenging times will go on to dominate for years to come as recovery starts to take place.
We in Nagaya Technologies Pte. Ltd understands that the year 2023 might not have begun the way everybody expected. We hope that in the rest year, there will be an uptrend recovery for the global economy. That is also why we created the world’s first hybrid digital assets called Nagaya which will soon be a part of the revolution towards sustainable Digital Assets for the Global DeFI space and delivers massive value to all of you. Interested to know more about Nagaya, you can visit our website at www.nagaya.co
Or you can talk to us at t.me/nagayaofficial
