The US Treasury and the Federal Reserve said only individual banks are facing difficulties, but experts warned the situation is much more serious than the government announced. With measures that the US is using to control inflation, almost half of the 4,800 banks in the US are nearly insolvent, as they have burned through their capital buffers, and the Fed will have to tighten even more.
The effects of the monetary tightening by the US Federal Reserve has yet to hit the economy and only experts know if the US financial system can safely ease debt pressures created by US COVID-19 Stimulus and Relief.
The White House doesn’t offer guarantees for all deposits because it would look like a social pension for the rich. In addition, the Federal Deposit Insurance Corporation (FDIC) said there is only $127 billion in assets and may need to be bailed out separately.
For that reason, financial authorities are now pressuring the U.S. Securities and Exchange Commission to crack down on short-selling strategies aimed at generating profits when bank stocks fall.
US banks may fail
First Republic Bank became the third US regional bank to fail since March. Before that, Silicon Valley Bank and Signature Bank also caused shock collapses. And the banking crisis shows no sign of stopping.
Last week, Bloomberg reported that PacWest Bancorp has been weighing a range of strategic options, including a sale. The San Francisco-based bank confirmed it was looking at “strategic options.” The news caused PacWest Bancorp shares to plummet.
USA Today cited a study that showed about 180 banks were at risk of bankruptcy. The main concern is deposit insurance, although currently only half of uninsured depositors are deciding to withdraw. Uninsured deposit means that the depositor accepts to lose part of the money if the bank fails. This also means that they have a higher incentive to withdraw money.
Why did US banks fail?
The main cause of these bankruptcies was the increase in interest rates by the Federal Reserve (Fed). The Fed had to raise interest rates to control inflation and this move reduced the value of assets held by banks, such as government bonds and mortgage-backed securities.
Normally, banks pay a fixed rate and their bonds become attractive when federal rates are low. On the other hand, as the interest rate increases, investors no longer favor the fixed rate of banks. When demand decreases, the price of these bonds will go down.
According to economists, the US government needs to intervene or refinance, otherwise, mass withdrawal is an unavoidable scenario.