The crisis in the banking sector ignited when Silicon Valley Bank, Silvergate, and Signature Bank—all notably crypto-friendly institutions—unexpectedly failed within a week. This sequence of events, though surprising, has its reasons.
The collapse of one bank can trigger a chain reaction, instilling panic among depositors who rush to withdraw their funds. This mass withdrawal can destabilize other banks, as they operate on the basis that not all deposited funds will be demanded simultaneously.
This crisis, despite being managed to some extent, reverberated throughout the banking world. Other banks, such as First Republic, teetered on the brink of failure, and the shockwaves even reached Europe, precipitating the fall of Credit Suisse, a key player among globally systemically important banks.
The tremors were felt as far as the eurozone, with institutions like Deutsche Bank experiencing a sell-off of their shares as investors fled.
To avert further disaster, it became clear that intervention by governments and central banks was necessary to stabilize the affected banks. The rationale was that the economic fallout from additional bank failures would dwarf the costs of rescue efforts.
Despite the logic behind these interventions, they were met with public outrage, particularly at the thought of taxpayer money being used to save private entities. The US government, however, assured that these were non-taxpayer-funded bailouts, mirroring strategies used during the 2008 financial crisis.
Regardless of the funding source, the general populace faces indirect consequences, such as inflation, raising concerns about the true cost of such bailouts.
Banks can falter for myriad reasons, but they all boil down to risk management. Should a bank with significant risk exposure collapse, it can trigger a domino effect. Depositors, spooked by the possibility of a similar fate, might rush to withdraw their funds from other banks, leading to a liquidity crisis.
And this is where you get your classic ‘bank run’ scenario.
In 2023, the downfall of many banks was attributed to a concoction of factors: high levels of debt, imprudent liquidity risk exposure, misalignment between assets and liabilities, subpar investment strategies, and overzealous risk-taking.
Could history repeat itself? All you have to do is take a closer look at what’s happening now.
Although the banking industry has been relatively quiet in recent news cycles, its precarious condition should not be overlooked.
It has been a year since the last crisis. Still, the situation hasn't improved— in fact, it is now much worse.
Experts are predicting several more banks to go under. What’s the cause this time? Commercial banks, along with the Fed, have been loading up on government debt.
This was fine when interest rates were super low. But now that the Fed has hiked rates to fight inflation, the value of banks’ government debt portfolio has dropped significantly.
Their values, now underwater, have depreciated to such a degree that most banks are virtually insolvent.
And this is just one risk factor among many others. It will affect everything from car loans and student loans to credit cards and even more complex financial products known as derivatives.
In 2023, the Federal Reserve tried to help by lending money to banks in need. It was called the Bank Term Funding Program, or BTFP for short.
But that program has ended. As a consequence, several economists are warning of another systemic banking crisis; one that can engulf both small and big banking institutions.
On top of all this, the US owes a lot of money—over $34.5 trillion.
What’s the Federal Reserve to do this time? If it decides to lower interest rates, such a policy will only spike inflation.
The foundations of the banking sector are cracking under the weight of depreciated government debt. The cocktail of risk factors—ranging from risky loans and volatile derivatives to the US national debt—is brewing a perfect storm.
As banks teeter on the brink of insolvency, people are beginning to lose trust in the financial system. So, brace for impact: THE IMPLOSION IS COMING, and it’s going to blow up every corner of the US economy.
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