Causes and side effects of the 2023 Banking Crisis

What is causing the banking crisis of 2023?

A banking crisis might happen when numerous banks in a country experience severe solvency or liquidity, either due to being struck by the same external shock of a group of banks' failure spreading throughout all banks in the system. Since the global financial crisis of 2007–2008, the US and Europe have not seen a catastrophe as severe as the banking crisis of 2023. The US Federal Reserve's aggressive interest rate increases are to blame for this financial catastrophe. The government bond portfolios owned by US banks experienced significant losses due to the rise in interest rates. Economic recessions, bad lending practices, excessive risk-taking, a lack of legislation or oversight, and outside forces like pandemics or natural catastrophes are common causes of financial crises. 

List of banks that have failed already recently

An organization at the federal or state level will close a bank if it cannot meet its responsibilities, which explains a failed bank. Depositors shall receive their insured money under the FDIC Federal Deposit Insurance Corporation. The list of banks that have failed are listed below: 

  1. First Republic Bank
  2. Signature Bank
  3. Silicon Valley Bank
  4. First City Bank of Florida
  5. The first State Bank
  6. Resolute Bank
  7. Louisa Community Bank
  8. Washington Federal Bank of Savings

Which banks are at risk? 

Risks in the banking industry have significantly increased, and they are anticipated to keep rising due to the economy's continued loss of liquidity and the general public's declining creditworthiness. Though anticipated, a financial system cannot be expected to cause a meltdown and a string of bankruptcies, and it can be predicted that the banking industry will likely see a period of declining profitability in the medium future, which the market will interpret as a signal to sell shares. The list of banks that are a probable risk is as follows: 

  1. Bank of America: The largest bank holding firm in terms of assets is Bank of America (BAC). The organization offers individuals and companies an extensive selection of financial services.
  2. Citigroup: It is the third largest bank in the country, which is likely to face a failure or crisis. 
  3. JPMorgan Chase Co.: Investment banking, financial services for consumers and small enterprises, managing assets, and investment banking are the bank's primary business segments.
  4. Morgan Stanley: Though a smaller bank compared to others, it has some similarities with business investment and does impact it. 
  5. Wells Fargo: is a prominent American holding firm that offers insurance and banking services. It belongs to the so-called "big four" banks in addition to BAC, JPM, and Citi.

Is the banking crisis over? 

It is assumed that the major US banking crisis of 2023 is over. Smaller banking companies play a crucial financial role. Thus, the banking sector's turbulence has been controlled, but it still needs to be done. This will have a lasting effect on the economy. 

Key lessons from the recent bank crisis. 

There are still many things to take away from the 2008–2009 financial crisis, even though it has been more than ten years since it occurred. While some people might be able to make quick money thanks to low-interest rates and other stimulants, too many diligent individuals lack the money to exploit these opportunities and profit from them. A few of the lessons grabbed from the past crisis are as follows: 

  • Tend to fail: Lawmakers and Federal Reserve governors also utilized the argument that international banks were likely to fail to justify bailing them out to prevent an international calamity that may have proved several times more catastrophic than the crisis itself.

  • Lowering the risk of Market Avenue: Additionally, banks had placed irresponsible wagers with their funds, often in stark contrast to the bets they had placed on the part of their clients. 

  • Overzealous Lending: The overheated real estate market that was fueled by shady lending to unqualified borrowers and the resale of these loans via concealed monetary instruments identified as mortgage-backed securities—which then worked their way using the global financial system—was the boiler at the heart of the financial crisis. 

  • Moral Hazard: It's much harder to prove that someone used illicit ways to profit from trusting and unwary investors and consumers. 

  • Painful: The financial crisis of 2008–2009 taught us somewhat difficult but important lessons. At the time, the Federal Reserve and the government implemented swift, unheard-of, and harsh actions to end the crisis. They implemented changes to try to avoid a repeat of the catastrophe.

How is it different from the 2008 banking crisis?

The different aspects of how 2008 banking is different from the recent one are as follows: 

  • Cause: Unlike the present crisis, which is brought on by the COVID-19 epidemic and its effects on the world economy, the 2008 crisis and the banking crisis in 2023 were brought on by the bust of the US real estate sector and the securitization of subprime mortgages.

  • Bank Failures: While the present crisis has been distinguished by extraordinary budgetary and fiscal assistance for the banking industry, the 2008 crisis resulted in a wave of collapses of banks and bailouts.

How is the banking crisis related to the recession? 

Asset values endure a sharp decrease in value during a financial crisis, firms and individuals cannot pay their loans, and financial institutions face a liquidity shortage, making it related to the recession. During a panic or bank run, investors sell off their assets from savings accounts out of fear that their value shall decline if they keep them in an investment company. This is a common feature of financial crises.

Final words

When asset prices fall significantly, firms and consumers cannot pay their loans, and financial institutions struggle to have sufficient liquidity. Hence a  US bank crisis arises. 

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Win Harrison 05 Jul, 2023

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