Many small and regional US banks are facing the risk of failure, especially with some banks facing the risk of failing or falling below their minimum capital requirements, according to Christopher Wolfe, managing director and head of North American banks at Fitch Ratings.
Economists on the US Bank Failures
Klaros Group analyzed around 4,000 banks and discovered that 282 were facing a banking crisis in the US. Some reasons behind the possibility of US bank failures are commercial real estate loans and potential losses from higher interest rates. Most of these banks are smaller ones with assets totaling less than $10 billion.
Brian Graham, co-founder and partner at Klaros Group, said that while most of these banks are not bankrupt, they are stressed, which could lead to fewer US bank failures. However, this stress could still affect communities and customers.
Graham said that this banking crisis in the US might lead to consumers experiencing effects like banks choosing not to invest in new branches, technology, or staff.
Sheila Bair, former chair of the U.S. Federal Deposit Insurance Corp., said that for individuals, the consequences of small US bank failures are mostly indirect. She noted that if individuals have deposits below the insured limit of $250,000, there would be no direct consequences for them in the case of bank failures in the US.
If a bank insured by the FDIC fails, all depositors will be reimbursed up to at least $250,000 per depositor per FDIC-insured bank, per ownership category.
Is There a Possibility of Another Banking Crisis in the US?
One of the important dates for understanding the banking crisis in the US is March 11, when the Federal Reserve will close the bank term funding program. This started a year ago due to the banking crisis in the US, such as the collapse of regional banks like Signature, Silvergate, and Silicon Valley.
The US bank failures happened because large numbers of customers withdrew deposits, particularly tech or crypto businesses needing funds for losses and attracted by better savings rates elsewhere.
Raising interest rates had already affected banks’ profitability and weakened their balance sheets by lowering the value of their government bond holdings.
The collapse of Silvergate was followed by an event on March 10 when Silicon Valley Bank announced its need to raise capital after selling bonds at a loss, triggering a bank run.
Subsequently, Signature and Swiss bank Credit Suisse also failed. Credit Suisse, facing longstanding issues, was finally taken over by UBS due to heightened anxieties exacerbated by the turmoil in the US.
Investors were concerned about the possibility of other banks failing, as most US banks faced similar risks of customer withdrawals and losses on bond investments.
The Federal Reserve’s Bank Term Funding Program (BTFP) helped reduce the panic by allowing banks to borrow from the central bank using their bonds as collateral. This provided banks with additional funding and restored the value of their bonds to their original face value.
This resulted in offsetting the impact of interest rate increases and improving their balance sheets. Since then, only one more bank, First Republic Bank in San Francisco, has failed.
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