How safe is the U.S. banking system?

Digital Originals

On March 10, the 16th largest bank in the U.S., Silicon Valley Bank, collapsed and was shut down by regulators. On March 12, Signature Bank followed suit.

The emergency measures caused a plunge in bank stocks around the world. What is happening to the U.S. banking system?

On March 10, the U.S. experienced its largest bank failure since 2008. The 16th largest bank in the U.S., Silicon Valley Bank (SVB) was shut down by regulators. SVB did not have enough cash to meet its depositors’ demands.

The collapse made it the second-biggest bank failure in U.S. history. Hours before getting shutdown, SVB gave out bonuses to employees.

NY-based Signature Bank, with $110 billion in assets, collapsed two days later. Signature Bank became the third-largest bank failure in the country’s history.

The shares of several U.S. regional banks tumbled on Monday, March 13.

The shocking collapse of the two banks led the U.S. government to intervene.

“Americans can have confidence that the banking system is safe. Your deposits will be there when you need them.” Said U.S. President Joe Biden

To shore up confidence and prevent further contagion, a plan was announced. The U.S. government said collapsed bank clients’ deposits are protected.

The government guaranteed access to client’s funds by March 13. The government’s guarantees include uninsured deposits.

Some investors are blaming the collapse on the Federal Reserve’s interest rate hikes. Others, like Senator Elizabeth Warren, are blaming it on banking deregulations. Specifically, the weakening of financial rules like the Dodd-Frank Act.

“With support from both parties, President Donald Trump signed a law to roll back critical parts of Dodd-Frank. Regulators, including the Federal Reserve chair Jerome Powell, then made a bad situation worse, ‌‌letting financial institutions load up on risk.”Wrote Senator Elizabeth Warren, in the New York Time.

“But the idea that you had two bank failures, including one that is the second largest bank failure in history, there’s going to be some blowback from this and I fully expect that there’ll be congressional hearings on these failures, both of them.” Associate Director and Professor at American University Washington College of Law, Gerard Comizio told Reuters.

U.S. President Joe Biden pledged to do whatever is needed for the banking system. The U.S. government’s decisive steps were welcomed by the IMF.

The question remains, will these actions be enough to stem the contagion to other banks?

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