Professional Documents
Culture Documents
1st Essay Corporate Banking - Caitlynn Hans Setiabudi
1st Essay Corporate Banking - Caitlynn Hans Setiabudi
Regional banks in the United States, have always been one of the foundations of local
economies and communities in the US. Now, they find themselves in the midst of a profound
crisis. In the year 2023 only, there have been 3 different major regional banks that went
bankrupt.
The implications of this crisis reach far beyond the realm of finance, touching the lives of
countless Americans and impacting the broader banking industry. Henceforth, understanding
the root causes of this crisis is not only imperative for the financial sector but also essential for
the well-being of communities nationwide.
This paper is dedicated to a comprehensive exploration of the reasons behind the crisis facing
regional banks in the United States in the year 2023, examining the intricate interplay of
economic, regulatory, and technological factors that have coalesced to challenge the very
existence of these institutions.
Analysis of the Reasons behind the Crisis of U.S. Regional Banks
The turbulence within America's regional banks began on March 8 when Silvergate Capital
Corporation, a key player in the cryptocurrency realm, announced plans for voluntary
liquidation. This unexpected move mainly stemmed from the fallout following the
cryptocurrency exchange FTX's crash.
Within a span of two days, another shockwave hit when US regulators closed down Silicon
Valley Bank, an institution synonymous with support to technological startups and venture
capital firms in and around the San Francisco Bay Area. The incredulity surrounding this event
owed much to Silicon Valley Bank's notorious yet steady presence in American banking
history.
As though these tremors weren't enough, within less than a week on March 12, New York
regulators shut down Signature Bank; marking the fourth-largest bank failure ever seen in US
history. Signature Bank's operations were notably similar to Silvergate Capital Corporation in
terms of focusing on cryptocurrency customers. Not too long afterwards, First Republic Bank
- known for providing wealth management and brokerage services - also landed squarely
amidst this brewing crisis due to fear among customers and investors that it could be next down
the line of failures.
Despite receiving a $30 billion infusion from 11 of America's leading banks towards mid-
March, First Republic Bank couldn't sustain itself. On May 1, 2023, US regulators took control
of First Republic Bank, eventually selling off its deposits and most of its assets to JP Morgan
Chase (The 2023 US Regional Banking Crisis Is far from Over, n.d.).
This tumultuous period entered the annals of US banking history as three out of the four most
significant bank failures. First Republic Bank, Silicon Valley Bank, and Signature Bank were
now second, third, and fourth in these infamous rankings. Collectively, the assets held by these
three fallen giants totaled $532 billion, surpassing the combined $526 billion held by the 25
banks that failed in 2008.
The reason why it is very important to be discussed is due to the impact caused by these
bankruptcies to the economy. Not only impacting the industries that each of the bank relates
to, they are also affecting the economy through their major roles in the banking system through
their relations with other banks. For example, the collapse of Silicon Valley Bank has
significant implications for the broader technology industry since they financed many of the
most innovative and high-growth companies in the sector. As a result, it is much more
challenging for these companies to secure the financing they need to continue to innovate and
grow (Barron, 2023). In addition to the impact on the technology industry, Banks and financial
institutions around the globe are rocking from the effects due to how vital Silicon Valley Bank
was to the banking industry as a whole. This bank crash has shaken people’s trust in the U.S.’s
power in tech and finance. Henceforth, it has thrown a big question mark over the country’s
role as a global bigwig.
Based on the huge impact that the bankruptcies of these banks possess, the reasons can be
divided into two parts; the common one and the specific one. Delving deeper into the
commonalities among these banks reveals some unsettling trends:
2. FED’s Misjudgements
One of the most important factors contributing to the current US banking crisis is the
FED’s single-minded focus on controlling inflation, which has led it to raise interest
rates too high and too quickly over the past year. Since March 2022, there have been
ten successive interest rate increases, with 0.25% being the latest increment. Coupled
with this surge is a large-scale contraction in the Fed’s balance sheet-a strategy known
as quantitative tightening.
The rise in interest rates has motivated depositors to remove funds from regional banks
to seek higher returns elsewhere. In order to cover these deposit outflows, regional
banks have found themselves forced to sell their long-term bonds prematurely at a loss.
Silicon Valley Bank serves as one prime example of this situation. They were docked
about $1.8 billion after parting with $21 billion worth of securities. This caused a major
shaking of confidence among its customers in the venture capital community
concerning the bank’s liquidity status.
After the failure of Silicon Valley Bank, Signature Bank’s depositors also panicked due
to the bank’s high proportion of uninsured deposits.
This recent legislative amendment has increased the threshold for heightened regulatory
standards from $50 billion to $250 billion. In the wake of these modifications, both
Silicon Valley Bank and Signature Bank managed to dodge these new regulations. At
first glance, this step may appear non-deadly as its motive is to alleviate regulatory
burdens imposed on small and medium-sized banks.
Nonetheless, specialists theorize that barring these amendments could have provided a
greater likelihood of circumventing the latest bank failures. If institutions like Silicon
Valley Bank, Signature Bank, and First Republic Bank were subject to things like living
wills and stringent stress tests, their latent risks birthed from rising interest rates and
excessive reliance on uninsured deposits could have been spotted and tackled sooner,
hence stopping their downfall.
In response to the bank failures, the Fed tried to rebuild the economy by implementing the
following:
Of particular note is that this is not to be construed as a bailout in any terms. The taxpayer will
not shoulder any of the losses associated with the resolution of Silicon Valley Bank. Rather,
the funds needed to cover lost deposits will emanate from both the assets of these banks and
insurance premiums paid for coverage by banks that are FDIC members. It should also be
clarified that these actions target only depositors; shareholders or investors will not receive
reimbursements (Foster, n.d.).
“While the Fed has been talked about a lot in the past year, until today it has been in the context
of monetary policy,” says Greg McBride, CFA, Bankrate chief financial analyst (The 2023 US
Regional Banking Crisis Is far from Over, n.d.). “But today, the Fed acts in the capacity of an
even more important role, the lender of last resort, to make sure banks and credit unions have
access to whatever cash they need without needing to sell high-quality assets that may be
trading for less than face value due to the sharp increase in interest rates.” (The 2023 US
Regional Banking Crisis Is far from Over, n.d.).
Even though these measures have helped reduce the problem of liquidity strains and the
potential risk of bank runs in the short term, it is still insufficient to address some of the
underlying vulnerabilities that could contribute to increased level of panic in the regional
banking sector. These underlying vulnerabilities include losses on existing assets, rising
funding costs, and a deposit flight away from small and medium-sized banks to big banks.
Additional to the present circumstances, it is insightful to recognize that in our modern era of
social media and digital banking, mere rumours can incite withdrawals, amounting to billions
of dollars from any size of bank, with mere mouse clicks or smartphone swipes. These 'digital
bank runs' can be exceedingly unpredictable and challenging to curtail.
Such an aspect, often underestimated, holds potent influence over a bank's potential insolvency.
It is a testament to the profound ways in which technology and communication platforms can
impact financial stability and should not be discounted when considering factors leading to a
bank's bankruptcy.
Regarding what the future may hold, it is uncertain what actions the government will take. To
this point, the Biden administration has proposed an array of potential enhancements to banking
regulation and oversight. This includes reversing some of the rules that were relaxed in 2018.
Nevertheless, these initiatives are expected to face substantial hurdles from a House of
Representatives controlled by Republicans.
In such a politically divided Congress, the likelihood of increasing the FDIC’s deposit
insurance limit appears rather low. Hence, while changes are potentially beneficial, they
remain, at present, difficult to implement amidst prevailing political ideologies.
Conclusion
In conclusion, the bankruptcy of U.S. regional banks in 2023 can be attributed to a convergence
of several factors. Foremost among these was the Federal Reserve’s stringent efforts to control
inflation, which led to abrupt and steep hikes in interest rates. Coupled with a quantitative
tightening policy, these measures resulted in significant unrealized losses for regional banks
on long-date securities/
The interest rate hike then prompted a chain reaction-depositors began withdrawing funds from
regional banks to seek higher returns elsewhere. To cover these withdrawals, banks were
compelled to prematurely sell their long-term bonds at a loss.
Another contributing factor was legislative changes that lifted the threshold for enhanced
regulatory standards from $50 billion to $250 billion, exempting banks like Silicon Valley
Bank and Signature Bank from heightened regulations. Experts have opined that if these
modifications were not enacted and the original standards maintained, the subsequent financial
disaster could potentially have been avoided.
Even though there are some steps taken to soften the impacts, the underlying problems have
not yet been resolved. Coupled with the high use of internet and spreading of hoax, the future
of banking industry in the U.S. is unknown.
Resources
Buchwald, E. (2023, April 28). Signature Bank failed because of “poor management,” FDIC
https://www.cnn.com/2023/04/28/business/signature-bank-fdic-
report/index.html#:~:text=The%20collapse%20of%20Signature%20Bank
https://www.investopedia.com/what-happened-to-signature-bank-7370710
What caused the US banking crisis and what could come next? (2023, May 12). Hargreaves
Lansdown. https://www.hl.co.uk/news/articles/what-caused-the-us-banking-crisis-
and-what-could-come-next#:~:text=Instead%2C%20the%20crisis%20was%20driven
Why U.S. Regional Banks Are Still in Crisis. (2023, June 16). Kellogg Insight.
https://insight.kellogg.northwestern.edu/article/u-s-regional-banks-are-still-in-crisis
Bansal, P., & Bansal, P. (2023, May 16). In the Market: Why US regional banks are doomed
regional-banks-are-doomed-doom-loop-2023-05-15/
Karaian, J., & Cowley, S. (2023, April 24). Smaller U.S. Banks Say the Crisis Is Contained,
https://www.nytimes.com/2023/04/24/business/regional-banks-crisis.html
The 2023 US Regional Banking Crisis Is Far From Over. (n.d.). The Wire.
https://thewire.in/banking/us-regional-banking-crisis-far-from-over
Foster, S. (n.d.). How The Fed Hopes To Prevent A Banking Crisis After SVB Collapse.
Bankrate. https://www.bankrate.com/banking/federal-reserve/why-fed-intervened-in-
silicon-valley-bank-collapse/
Barron, M. (2023, March 21). Effects of the Silicon Valley Bank Collapse.
Globaledge.msu.edu. https://globaledge.msu.edu/blog/post/57251/effects-of-the-
silicon-valley-bank-colla