2023 United States Banking Crisis and Its Implications

The 2023 United States banking crisis was a complex and far-reaching event that had significant implications for the country's financial system. The crisis began in March 2023 with the collapse of Silicon Valley Bank, which was the 16th largest bank in the US.

The collapse of Silicon Valley Bank was triggered by a combination of factors, including a decline in tech stocks and a surge in deposit withdrawals. This led to a liquidity crisis that ultimately resulted in the bank's failure. The bank's failure was a major shock to the financial system.

The failure of Silicon Valley Bank had a ripple effect on the financial markets, causing a wave of panic selling that led to a sharp decline in stock prices. The crisis also highlighted the vulnerability of the US banking system to economic shocks.

The crisis led to a series of emergency measures by the Federal Reserve and other regulatory agencies to stabilize the financial system and prevent a wider collapse.

The 2023 United States banking crisis was a wake-up call for many. The failure of Silicon Valley Bank (SVB) on March 10, 2023, was a direct result of a sharp tightening of monetary policy that began in March 2022.

Tighter monetary policy had a significant negative impact on the value of long-term assets on bank balance sheets. This decline in asset values relative to liabilities can lead to bank instability through two channels.

Systemwide uninsured depositors make up about half of bank deposits. This is a crucial fact, as it shows that many people's savings are not insured, leaving them vulnerable to bank failures.

The SVB failure was not solely due to its asset losses. In fact, the bank was not an extreme outlier from the perspective of asset losses. However, it was an outlier from the perspective of its liabilities.

Some 92.5 percent of SVB's deposits were uninsured, leading to significant withdrawals that ultimately resulted in the bank's collapse within two days. This rapid collapse highlights the importance of understanding the liability side of a bank's balance sheet.

The 2023 United States banking crisis has revealed some alarming facts about systemic risk and regional disparities. Almost 190 banks with assets of $300 billion are at a potential risk of impairment if only half of uninsured depositors decide to withdraw.

Regions with lower household incomes and large shares of minorities are more exposed to bank risk. This is because bank asset values are less than the face value of their liabilities in these areas.

Counties with a higher percentage of minorities, especially those with more than 80 percent Black and Hispanic population, tend to be more exposed to bank risk. In fact, counties with more than 90 percent Black and Hispanic population have about 4 percent of total deposits at the risk of impairment.

Counties with low median income are also more likely to be exposed to bank risk, with regions having median annual income below $35,000 being mostly exposed, with about 4 percent of deposit at the risk of impairment.

Systemic risk is a major concern in the US banking system. Almost 190 banks with assets of $300 billion are at a potential risk of impairment if only half of uninsured depositors decide to withdraw.

Regions with lower household incomes are more exposed to bank risk. This suggests that areas with less economic stability are more vulnerable to bank failures.

The recent decline in bank asset values has significantly increased the fragility of the US banking system. This is especially true for commercial real estate, which has seen significant value drops.

We find that regions with large shares of minorities are also more exposed to bank risk. This highlights a concerning disparity in the banking system's impact on different communities.

Regional disparities play a significant role in systemic risk, particularly in the banking sector. The risk of impairment is not spread evenly across the country, with some regions being more exposed than others.

Counties with a higher percentage of minorities, especially those with more than 80 percent Black and Hispanic population, tend to be more exposed to bank risk. This is evident in counties like New Hampshire, Massachusetts, Wyoming, and New York, which have up to 13 percent of their deposits at risk.

Regions with lower household incomes are also more likely to be exposed to bank risk. In fact, counties with low median income are more likely to have about 4 percent of their deposits at risk of impairment. This is a concerning trend, especially in areas where median annual income is below $35,000.

Counties with a high percentage of Black and Hispanic population, such as those with over 90 percent of their population identifying as such, have an average of about 4 percent of total deposits at risk of impairment. This highlights the need for targeted support and regulation in these regions.

The 2023 United States banking crisis has significant policy and economic implications. The crisis highlights the fragility of the U.S. banking system to higher interest rates that can lead to insolvency bank runs by uninsured depositors.

Our analysis suggests that hundreds of banks could be at risk due to the fundamental insolvency risk. This is a stark reminder of the importance of financial stability and regulation.

The creation of the Bank Term Funding Program in March 2023 may have put a pause on the crisis, but it does not address the underlying issue. A near-term response to the crisis could involve a recapitalization of the U.S. banking system.

Regulators could adopt a stress test methodology to assess the insolvency risk due to runs by uninsured depositors. This would take into account both the composition of bank assets as well as their liabilities.

Stricter capital requirements could bring bank capital ratios closer to those of less-regulated lenders. However, this is a complex issue with a heated debate surrounding it, similar to the one that occurred after the 2007 financial crisis.

The US Federal Reserve has committed a staggering $140 billion to guarantee all deposits at Silicon Valley Bank and Signature Bank. This massive financial safety net is part of the $400 billion in direct support provided so far.

Banks have also drawn on nearly $12 billion of loans from the Fed's new emergency lending program, with a total of $318 billion loaned to the financial system. This is about half the amount extended during the global financial crisis.

The banking industry has coughed up billions to shore up confidence in the system, with JPMorgan Chase, Bank of America, and Citigroup among a group of 11 lenders providing a $30 billion cash infusion to First Republic Bank.

Almost 190 banks with assets of $300 billion were at a potential risk of insolvency if only half of uninsured depositors had decided to withdraw in March 2023.

The risk of insolvency was not just limited to banks with low capitalization, as about 500 banks had larger unrecognized losses than SVB, which failed in March 2023.

SVB had a disproportionately large share of uninsured funding, with 78% of its assets funded by uninsured deposits, making it more susceptible to solvency runs.

Banks with smaller initial capitalization, higher uninsured leverage, and a higher share of sophisticated depositors are more susceptible to solvency runs and insolvency.

Even with liquid assets, banks can still experience solvency runs due to the decline in asset values caused by monetary policy tightening.

The market value of long-dated assets, such as residential mortgages and commercial mortgages, declined by more than 10% following the monetary tightening from the first quarter of 2022 onward.

Long maturity Treasury bonds were particularly affected, losing about 25% and 30% of their market value, respectively, as suggested by iShares Treasury ETF.

The BTFP, or Bank Term Funding Program, was a lifeline for US banks during the recent banking crisis. It allowed banks to borrow from the central bank using their bonds as collateral, effectively negating the interest rate rises and reinflating their balance sheets.

The program priced the bonds at their original face value, not market value, which helped to stabilize the banks' finances. This move was a crucial step in preventing a wider banking collapse.

Banks have had another year to adjust to higher interest rates, and they can still borrow from the Fed through the discount window. This should help them weather the closure of the BTFP.

However, the program's closure is likely to increase banks' borrowing costs, which could lead to higher lending rates or reduced credit availability for customers. This could have a ripple effect on the economy.

The BTFP's closure is not expected to lead to more bank collapses, but it may still have a significant impact on the banking sector.

In the United States, accounts with less than $250,000 at a US bank insured by the FDIC are almost certainly safe.

Joint accounts in the US are insured up to $500,000.

European countries offer similar deposit insurance programs, with Switzerland insuring up to 100,000 Swiss francs ($108,000) per depositor.

In the European Union, customers of failed banks are promised €100,000 ($105,431) of their deposits back, with joint account holders eligible for a combined €200,000 ($210,956) in compensation.

The United Kingdom offers depositors up to £85,000 ($102,484) in compensation if their bank fails, doubling to £170,000 ($204,967) for joint accounts.

It's reassuring to know that there are safeguards in place to protect our money in case of a bank failure.