One Bad Apple Bank Spoiled the Whole Damned Bunch Federal Funds Rate Increase
The bankruptcy of 🏦 Silicon Valley Bank (SVB) was one of the most significant events in the US financial market over the past 15 years. SVB, which was the 16th-largest asset in the country, went bankrupt after a decline in the value of its assets due to rising FED rates and an outflow of funds from client accounts. However, economists warn that this is not the only case, and nearly 200 more banks in the US could face similar risks.
The Research
A study by economists from the University of Southern California, Northwestern University, Columbia University School of Business and Stanford University shows that the market value of US banking system assets is 💵 $2.2 trillion below book value. Banking assets fell by an average of 10%, and some banks suffered the most serious losses – by 20%.
One of the factors contributing to the bankruptcy of SVB was the outflow of funds from customer accounts. Clients have withdrawn about $100 billion in deposits. The study also found that a number of banks in the US face the risk of an outflow of uninsured deposits, which could have serious implications for their financial stability. If half of the uninsured depositors decide to withdraw their money, some 186 banks and $300 billion of insured deposits will be at risk. At the same time, if banks are forced to sell their assets to cover losses, the losses may be even more significant.
Risks & Reaction
The bankruptcy of the SVB also signaled the risks associated with the increase in the rates of the Federal Reserve and could have a negative impact on the US banking system. Banks with a high level of dependence on short-term financing may face increased costs for servicing their obligations and reduced profits. This may lead to a decrease in the profitability of banks and a weakening of their financial stability.
In addition, the bankruptcy of SVB also highlights the role of market shocks and unexpected events, which can cause a cascade effect and affect other banks and financial institutions. In turn, the Fed, the US Treasury and the Federal Deposit Insurance Corporation assure that the banking system is in perfect order and continue to make public statements of this nature with enviable regularity. At the moment, they manage to calm the population, as evidenced by the market, which has stopped its fall.
To reduce risks and ensure the stability of the US banking system, economists propose a number of measures. One of these measures is to improve the regulation and supervision of banks in order to prevent illegal practices and excessive risky behavior. It also suggests strengthening financial planning and stress testing of banks to assess their ability to withstand market shocks. In addition, it is important to develop measures to diversify and reduce the dependence of banks on short-term financing in order to reduce the risks of an outflow of customer funds during periods of instability.
Conclusion
The failure of Silicon Valley Bank raises important questions about the risks to the US banking system and the need for action to improve its stability and resilience. Regulation, supervision, financial planning and diversification can be key tools to mitigate risks and ensure the stable functioning of the banking system.
