186 US banks are at risk of collapse

Outside a branch of First Republic Bank in San Francisco, USA - Photo: REUTERS

Last week, First Republic Bank declared bankruptcy and was taken over and restructured. This is the second largest collapse in US banking history after Washington Mutual (2008).

Nearly 190 US banks could collapse

First Republic Bank is also the third regional bank in the United States to fail since March. Previously, Silicon Valley Bank and Signature Bank had shocking collapses. And the banking crisis shows no signs of stopping.

Bloomberg News reported this week that PacWest Bancorp is also considering a sale. The San Francisco-based bank confirmed it is reviewing “strategic options.” The news sent PacWest Bancorp shares plunging further.

A study by USA Today found that about 186 banks are at risk of failure. The main concern is deposit insurance, although only half of uninsured depositors are currently deciding to withdraw their money.

Uninsured deposits mean depositors accept losing some of their money if the bank fails. This also means they have a greater incentive to withdraw their money.

Why did the US regional banks collapse?

Silicon Valley Bank is an example of how the pressure on US regional banks has been exacerbated by the Federal Reserve’s interest rate hikes.

The Fed has had to raise interest rates to curb inflation. But this move has reduced the value of the assets banks hold, such as government bonds and mortgage-backed securities.

Normally, banks pay fixed interest rates, and their bonds become more attractive when the federal funds rate is low. But when the Fed rate rises, as it is now, investors are less attracted to banks' fixed interest rates. As demand falls, the prices of these bonds fall.

“The recent decline in bank asset values ​​has significantly increased the vulnerability of the U.S. banking system to uninsured depositors,” economists wrote in a study by the Social Science Research Network.

According to the above economists, the US government needs to intervene or recapitalize. If the government does not act, a mass withdrawal of money from banks is an inevitable scenario./.

According to TTO

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