Recent Bankruptcies in the United States: Is a New Banking Crisis Imminent?

BY: ANDRÉS DÍAZ MORALES

Accounting and Finance Student
Anáhuac Querétaro University.

A bank is a financial institution that is dedicated to intermediation between those who have surplus capital (savers or depositors) and those who need financing or loans. Banks play a fundamental role in the economic system by facilitating the flow of money and resources between different economic actors.

Banks are regulated by the financial authorities of each country to ensure stability and confidence in the financial system. Additionally, they are subject to capital requirements, transparency standards, anti-money laundering regulations, and consumer protection, among others.

Recently, we have heard in the media, social networks, television or other media, about the recent crisis that some banks in the United States have had, which has even led some to their final bankruptcy. Therefore, an enormous panic has been unleashed in American society that has begun to reconsider whether its money is safe.

It is natural to think about whether a global financial crisis similar to 2008 is imminent due to the recent and scandalous events of the bankruptcies of some banks in the United States, and despite the multiple regulations that exist, how is it possible that there have been 3 banks bankrupt?

Silvergate, Silicon Valley Bank and Signature are the banks that recently failed, but these bankruptcies do not signify absolutely any symptoms of an upcoming banking crisis; From 2008 to 2010 alone, considered one of the biggest financial crises in world history, 322 banks failed, there is no need to worry at all.

In the case of Silicon Valley Bank, its bankruptcy had a lot to do with the increase in interest rates set by central banks in order to discourage consumption and make bank loans or credits more expensive. SVB concentrated on owning the capital of the startups, however, due to the COVID 19 crisis, a drop in interest rates was generated, so accessing a loan was cheaper, on the one hand, the startups received money for part of investors or loans that they deposited in the bank to use as their operating needs demanded, this generated a big problem for SVB since it could not place that money in loans or credits at a higher rate, which is why it decided to invest in bonds issued by the United States government that guaranteed greater income with which they could pay their depositors and operating expenses.

When the FED (Central Bank of the United States) began to raise its reference interest rates, it generated a serious impact on financial assets, particularly in the bonds that SBV had acquired, this caused the bonds to be worth less, since there were new bonds with an interest rate that paid more, therefore, faced with the rise in rates and the increase in the cost of money, the startups that had deposited their money began to withdraw it and run out of their cash and with this, they began to deplete their reserves. that the bank had, given this situation SVB decided to sell its positions with US government bonds to meet the demands of its depositors and cover the missing cash, this generated a loss of 1.8 billion dollars, however, despite that big loss, the bank could not meet the demand of 2.25 billion dollars from its depositors.

The bank decided to ask for a capital increase from its investors, but it was denied. After this alarming news in the United States media, there was a massive cash withdrawal by SVB clients, where the bank could not do more. and was left without meeting the demand, hours later, the bank declared bankruptcy.

For its part, Silvergate, which is another of the banks that recently failed in the United States, had something similar happen to SVB. In 2013, Silvergate began to offer financial services linked to cryptocurrencies, its impact was so great that it became the bank’s main business. Silvergate’s bankruptcy began when there was a massive drop in cryptocurrency assets, in addition to fraud lawsuits linked to FTX, (one of the largest platforms for buying and selling cryptocurrencies) this caused its share price to drop. would plummet to a historic low, just in the last quarter of 2022,

Silvergate announced a net loss of $1 billion after a broad streak of customer withdrawals that reached nearly $4 billion. Silvergate also went to ask for loans and capital increases, but they were denied, so it had no choice but to declare bankruptcy.

Finally, Signature, more than a bankruptcy, had an intervention by the New York department of financial services due to bad practices and partly the domino effect of the bankruptcies of the last 2 banks. Like Silvergate, it was related to cryptocurrencies, since the money that was deposited for the purchase of these assets was deposited in Signature, but the cause of its collapse was the harsh contraction in the prices of these assets, given this its shares fell 25%, and caused a massive panic and withdrawal that forced it into crisis, which is why the United States government decided to intervene to avoid another tragedy like Silvergate or SVB.

The US government reported that all deposits are safe, but this may have an impact on the state’s public finances by trying to cover the missing deposits, which are not just anything, in addition to this, the million-dollar losses from the sale of assets.

No bank in the world is exempt from bankruptcy in the face of an imminent massive withdrawal of deposits caused by an internal crisis or lack of financial supervision, however it must be taken into account that banks, at least in Mexico, have high regulation of its assets, in addition to international standards and credit ratings that secure our money.

For its part, the Bank of Mexico has measures and regulations that monitor the behavior of the financial system, as well as the financial entities that participate in it, and also has a mandatory bank deposit fund in case withdrawals increase.

Saying that the United States is going through a banking crisis may not be entirely accurate, since the largest banks appear strong and, on the contrary, regional banks are the most likely to fail, even so, we must be completely calm and out of it. of panic, since we are nowhere near a crisis like the one we saw in 2008.