The Risks and Challenges of the US Banking System Revealed
Recently, cracks in the US financial system have been exposed, with thousands of small and medium-sized banks facing risks. Initially, a small crisis at a local bank in California was reported, but within days, it pushed the world’s largest central banks to cooperate and provide liquidity to the financial system. The move came after the Swiss Central Bank provided a safety net of $110 billion to prevent the collapse of Credit Suisse, which could have led to a major upheaval in the global financial markets.
To tackle the crisis, the Fed introduced a new program to help banks called the Bank Term Funding Program (BTFP), which guaranteed all banks and financial institutions in the United States the possibility to receive loans from the Fed against approved assets. The loans were given for a period of one year and with an interest rate of about 4.2%. The program was immediately in demand, and in just two weeks, the Fed’s balance sheet increased by $391 billion, erasing all the reductions made since October 2022.
The capital and collateral crisis of the banks, initially perceived as a small, local issue, is spreading. According to data from the Federal Deposit Insurance Corporation (FDIC), all US banks together have unrealized losses of about $620 billion on bonds, and the American banking system has a deficit of $2.2 trillion on the value of its assets, compared to the value recorded in the books, according to researchers from Columbia University.
The risks are significant, as even if only half of the depositors not insured by the FDIC, who hold about $9 trillion, were to withdraw their money, 190 banks would have collapsed. If 100% of the uninsured deposits were withdrawn, more than 1,600 banks would collapse, including very large banks.
The financial crisis of 2008 revealed the fragility of the US banking system, and the current situation suggests that more work is needed to ensure its stability. While the central banks have taken measures to address the crisis, the risks and challenges faced by the US banking system are significant and should not be underestimated.