Banking Crisis in US
Table of Contents :
First Republic Bank Crisis
Regulators Worried
Coming Recession
International Effect
New Challenges
Effect on Economy
Disclaimer.
This recent Banking crisis in the US came as a surprise to many.
Even though Fed is trying to contain the damage, but as a smart investor you need to be aware about this evolving situation, and I will share my perspective about it.
First Republic Bank Crisis
Depositors at First Republic Bank pulled out more than $100 billion during last month's crisis.
The fear is, it could be the next bank collapse after Silicon Valley Bank and Signature Bank.
In order to cut costs, asset sales, restructuring its balance sheet while laying off close to quarter of its workforce is on the agenda.
Inspite of that the stock is in a free fall.
Even though it's clients are mostly rich and powerful and they have yet not defaulted on loans.
But massive withdrawals lead to fears as most of the deposits exceed FDIC's guarantee limits.
Regulators Worried
Banking regulators are worried about dangers larger regional lenders pose to financial stability of the economy.
The concern is, large proportion of deposits in these lenders are uninsured, which could have a compounding effect on other banks in case of a bank run.
These global systemically important banks were identified in the aftermath of 2008 financial crisis.
Recently these regional banks have grown considerably in size and complexity.
Surely FDIC is also aware of the challenges failure of these regional banks might pose, but reality remains they could not comprehend failures that we saw recently.
I believe, oversight mechanism failed to foresee effect of rapid rate hikes, both on asset and liability side of bank balance sheets.
Coming Recession
In order to have a soft economic landing, policymakers at the Fed voted unanimously for a smaller rate hike this time.
Twin mandates of the central bank are, 2% inflation target and a sustainable economic growth.
Even though inflation is inching down yet remains way of the target, but with recent bank runs in the US, depositors feel worried.
That is why in order to maintain stability of financial system, Fed is taking a cautious approach with rate hikes this time.
I am hoping to have a 0.25% rate hike this time.
Wordwide Effect
Recently there are many concerns about the worldwide banking system.
In order to calm the markets, the Federal Reserve and other central banks announced significant US dollar liquidity measures.
Some of the European banks are also feeling pressure, as troubles faced by Credit Suisse is a perfect example how interconnected our finances are these days.
Some Asian Central banks may not be affected by this but that is by design.
Even the Australian central bank has indicated a potential pause in their rate hikes.
The European STOXX 600 index is down recently, and even IMF is now slashing growth estimates.
I think everybody in this world will be affected, difference will be the degree of it.
Welcome to the world of modern interconnected finance.
New Challenges
While US banking crisis of early 2023 might has subsided, but some vulnerabilities are still there.
In the blink of an eye, Switzerland was close to facing a full-scale bank run when UBS had to take over Credit Suisse.
Several other euro-zone banks including a German banking major came under pressure, as investors dumped their shares en masse.
It seems direct taxpayer money was not used in bailouts like 2008 financial crisis.
But in my opinion, if a major bank collapses, depositors money could be used beyond FDIC’s guaranteed limits, which is called bail-in.
It has already been tried in Greece few years ago, and we need to be ready for that just in case.
Effect on Economy
Recent US Banking crisis it seems will effect American economy negatively, which could bring in a mild recession later this year.
A larger bank like JP MorganChase can better sustain major withdrawls, but could be catastrophic for a smaller regional bank.
As a result lending in mid America will suffer where these smaller regional banks have more marketshare.
Consequently, smaller businesses which are the backbone of US economy could face massive liquidity crisis, if no remedial action is taken in time.
As they are major employers collectively, so huge jobs losses could be around the corner that might lead to a US Recession.
If that happens we need to be ready, so conserve capital for possible tough times ahead as cash will be king.
Disclaimer
As a disclaimer, I’m not a financial advisor please consult one before investing based on your personal financial situation.