The banking sector in the United States has recently experienced a strong upheaval. The collapse of Silicon Valley Bank only confirmed the critics of this type of institution that banks will fail sooner or later. The stability of this type of institution is decreasing, and this is due to a number of factors. Constantly increasing interest rates led to a decrease in the market value of the system’s assets in the US by 2 trillion USD. Added to this is a large share of uninsured deposits. Economists predict that in the coming years we will face a series of bankruptcies of many entities from the traditional banking sector.
Will SVB drag other banks down with it?
Last week’s collapse of Silicon Valley Bank confirmed concerns that many in the cryptocurrency sector have been espousing for years. Namely, it is about the fragile structures of the traditional financial system, which is beginning to enjoy less and less public confidence. Recently, four economists presented a report in which they included a detailed analysis of the threats affecting other financial institutions. As we read in the document:
Even if only half of uninsured depositors choose to withdraw, nearly 190 banks remain at potential risk of losing the value of insured depositors, with potentially $300 billion in insured deposits.
As stated, the way the US Federal Reserve conducts its monetary policy can have a negative impact on long-term assets such as government bonds and mortgages. As a result, it may deepen the losses among banks. The analysis explains that a bank is declared insolvent when the market value of its assets, after all uninsured depositors have been paid, becomes insufficient to cover all insured deposits.
Recent declines in bank asset values have greatly increased the vulnerability of the US banking system to uninsured depositors
– summarized in the study.
The Fed wants to protect the banks, but at what cost?
The US Federal Authorities have pledged to protect SVB and Signature Bank depositors. President Joe Biden also said that the banks’ deposit protection program will not impact taxpayers.
Thanks to actions we’ve taken over the past few days to protect depositors from Silicon Valley and Signature Banks, Americans can have confidence that our system is safe.
People’s deposits will be there when they need them – at no cost to the taxpayer.
“Can you assure Americans that there won’t be a ripple effect? Do you expect other banks to fail?”
BIDEN: *shuts door*pic.twitter.com/OuszLHyFyV
— Tommy Pigott (@TommyPigott) March 13, 2023
However, the words of the head of state did not sound very credible, and the public commented on his declaration, considering his promises groundless.
Everything you do or touch costs the taxpayer
– wrote Joe Billie from the Republican party.
And here it’s hard to disagree. There is a paradox here. The Federal Reserve announced a special funding program for banks to protect them from collapse. A $25 billion fund has been announced for this purpose. Now the question arises where the institution will get the money for it, since there is a budget hole of $ 3 trillion in the state budget.
Two weeks ago, the Biden administration unveiled its budget proposal for next year. It contains controversial ideas about increasing taxes for entities from the cryptocurrency sector. The US government intends to obtain as much as 24 billion dollars in this way to cover the deficit, which it is consistently increasing.