The banking crisis continues in the United States, with half of American banks having exhausted their capital reserves, according to information from The Telegraph. Thus, thousands of banks would be potentially insolvent, including a global bank considered systemic. Have we reached the point of no return?
The banking crisis continues in the United States
While First Republic Bank was acquired at the beginning of the week by JP Morgan Chase following an agreement with the Federal Deposit Insurance Corporation (FDIC), which paid it financial aid of 50 billion dollars in parallel, it could be that the infection continues.
This action, which constitutes the second largest US bank failure in historyfollows a chain collapse of Silicon Valley Bank, Signature Bank and Silvergate in recent months.
First Republic Bank saw its deposits drop by around 100 billion dollars in March, and the financial support of 30 billion dollars paid to it by a consortium of 11 banks made up in part of the largest banking establishments Americans, namely JP Morgan, Citigroup Inc., Bank of America Corp. or Wells Fargo, will not have been enough to save her.
Well, according to information from The Telegraph published on May 2, half of the 4,800 American banks currently in existence (compared to 20,000 in 1900) would have exhausted their capital reservesalthough under US accounting rules, the banks involved are not required to recognize their losses.
On the day this article was published, Pacific Western Bancorp. and Western Alliance Bancorp. both saw their respective shares drop drastically during the day, causing such volatility that trading in these shares had to be halted. Although PacWest is a smaller bank than First Republic Bank, 80% of its loan portfolio is in mortgages and commercial real estate loans.
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Will the FDIC soon be unable to participate in buybacks?
According Amit Seru, professor at Stanford in the field of financea significant portion of banks in the United States is at risk:
” It’s frightening. Thousands of banks are under water. Let’s not pretend it’s just Silicon Valley Bank and First Republic. Much of the US banking system is potentially insolvent. »
According to a 31-page document published by Amit Seru and banking experts on March 24, more than 2,315 US banks would have more exposures than they actually hold, rendering them de facto insolvent. As such, the market value of their loan portfolios would be $2 trillion less than their book value.
Moreover, among these risky banks is a global institution considered systemic, with assets exceeding $1 trillion (his name was not mentioned). In addition, the FDIC will not be able to help certain banks to buy back others indefinitely, the organization having “only” 127 billion dollars of assets at its disposal.
In these cases, financial assistance is absolutely vital given the costs involved in taking over a bank. So, a depletion of FDIC capital would signal the beginning of a paradigm shift.
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