## Foreword

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### March 2023 banking stress
- In March 2023, banking stability was tested.
- Silicon Valley Bank (SVB) and Signature Bank of New York, US regional banks, failed after rapid depositor flight.
- One week later, Swiss authorities announced a state-supported merger of Credit Suisse with UBS following a loss of market confidence.
- This marked the first failure of a global systemically important bank since the global financial crisis.
- In March, US and European bank stock prices sold off significantly, by about 25 and 14 percent, respectively.
- A flight to quality in sovereign bond markets and a reassessment of the global monetary policy path occurred even as coordinated central bank action served to contain broader financial market stress.

### Authorities' policy responses
- US authorities applied a rarely used “systemic risk exception” allowing the Federal Deposit Insurance Corporation to protect all depositors of the banks under stress, at higher cost to the deposit insurance fund.
- The Federal Reserve created a new lending facility allowing all banks to borrow against high-quality securities at par value—which is generally higher than market values—to mitigate liquidity pressures on the banking system.
- Swiss authorities implemented a state-supported merger that included both liquidity support and a fiscal backstop.
- These quick and decisive actions contained the immediate threats to financial stability.

### Underlying vulnerabilities and monetary tightening
- The events underscore challenges from the interaction between tighter monetary conditions and vulnerabilities built up since the global financial crisis.
- After years of low interest rates, tighter monetary policy is challenging banks’ effective risk management in securities portfolios and of loan exposures.
- With few signs of underlying inflation abating, most central banks are expected to continue tightening.
- Well-telegraphed and appropriate monetary tightening has created a challenging environment for bank and nonbank financial intermediaries that are poorly managed, as evident in the newfound focus on unrealized interest rate–driven losses in securities portfolios.
- Some institutions are simply unprepared for the higher rate environment.
- Previous Global Financial Stability Reports have consistently warned of risks to the financial system from rapid monetary tightening following the period of high liquidity and low rates.
- Financial Sector Assessment Programs have flagged country-specific gaps in supervision, regulation, and resolution.

### How this episode differs from past crises
- The current stress is squarely in the banking system, whereas the 2008 crisis quickly spread from banks to nonbanks and off-balance sheet entities of banks.
- The 2008 crisis was triggered by credit losses due to housing market declines, while the current turmoil in part stems from unrealized losses in portfolios of safe, but falling-in-value, securities.
- Bank capital and liquidity rules and crisis management frameworks were strengthened significantly after the global financial crisis, helping stem a broader loss of confidence and underpinning a swifter and better coordinated policy response.
- The current turmoil differs from the 1997 Asian financial crisis, when current account deficits and heavy external borrowing exposed corporates and banks to exchange rate and funding risks.
- The current turmoil differs from the 1980s US savings and loan crisis, which occurred outside of larger banks, in entities with significantly less capital and liquidity.

### Risks ahead and market conditions
- Stresses triggered by the tighter stance of monetary policy may result in further bouts of financial instability.
- Activities in riskier segments of capital markets such as leveraged loans and private credit markets have slowed.
- Concerns have been growing about conditions in commercial real estate markets, which are heavily dependent on smaller banks.
- While banking stocks in advanced economies have undergone significant repricing, broad equity indices remain very stretched in many countries, having appreciated markedly since the beginning of the year.
- A more extensive loss of investor confidence or a spreading of the banking sector strains could amplify risks to financial stability.

*International Monetary Fund | April 2023.*

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_Source: https://www.imf.org/-/media/files/publications/gfsr/2023/april/english/foreword.pdf_