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<\/figure>\n<\/div>\n\n\nAcross the United States and even abroad, there was a sense of stupor and disbelief after the announcement of the bankruptcy of Silicon Valley Bank last week, and the subsequent bankruptcy of two other banks: Signature Bank and Silvergate Bank. ).<\/p>\n\n\n\n
The bankruptcy of Silicon Valley Bank was a shock to the system, as it is the sixteenth largest bank in the ranking of American banks, with a capital of approximately $220 billion. What adds to the mystery is that the bank underwent periodic scrutiny of its financial operations by Treasury inspectors shortly before declaring bankruptcy. The combined value of the three bankrupt banks is more than $330 billion. However, it should not be surprising that these recent collapses occurred, if we know that more than 550 banks went bankrupt between 2001 and the beginning of 2023. However, this recent bankruptcy was particularly striking. It happened at a time when many people in the US were already fearing a recession, and Silicon Valley was the biggest bank to fail since the government shut down Washington Mutual amid the 2008 financial crisis. So what happened to the Silicon Valley Bank, and what happens to the American banks, for these three banks to suddenly go bankrupt, without the bank regulators in the Treasury and the Federal Deposit Insurance Corporation noticing?! And where were the San Francisco Fed officials responsible for supervising Silicon Valley Bank?!<\/p>\n\n\n\n
According to the official and private explanations announced, the management of Silicon Valley Bank is responsible for what happened as a result of its bad investment decisions. The bank’s management has invested tens of billions in fixed-income bonds. And when the Federal Reserve began to increase the interest rate from 0.5% to 4.75% within a year, these bonds did not make enough profits to cover the bank’s need, and it was difficult to sell these bonds without a loss, and this was accompanied by high withdrawals from depositors that made the bank exposed . In fact, short-term bonds lost – for the first time in their history – about 13% in the past year, as revealed by the Total Bond Index. As for the other two banks, their losses were due to the fact that most of their loan portfolio is invested in digital currencies, which have fallen in value by a large percentage.<\/p>\n\n\n\n
However, despite the explanations given by government officials and economists, the average citizen finds it difficult to digest these official explanations and be reassured that the banking system is safe. If we accept the declared explanation for the bankruptcy of the Silicon Valley Bank due to falling bond interest, which is an incomplete explanation because it covers one side of the problem, how can we accept the explanation for the bankruptcy of the other two banks due to digital currency loans? Who among us wasn’t surprised that these banks were drowning in bad cryptocurrency debts! Will there be more bank surprises? This is what I will try to answer in this article.<\/p>\n\n\n\n
Was the repeal of the Glass-Steagall Act the beginning of the banking problems?
To understand what is happening in the American banking system, we must go back some way to the Great Depression (1929-1939). The Great Depression began with a stock market crash, followed by bank failures and a cash shortage. Banks collapsed because they had a surplus of large loans that could not be liquidated, in addition to customers withdrawing their money, due to the loss of confidence in banks and their fear of losing their savings. Because of this, Congress enacted the Banking Act of 1933, which created the Federal Deposit Insurance Corporation (FDIC) and mandated many other banking reforms. This entire law is often referred to as the Glass-Steagall Act. The important part of the law is that it effectively separates commercial banking from investment banking. And thus preventing banks from carrying out investment banking services such as: trading in derivatives and securities, i.e. trades that carry great risks. However, over the years, the banking lobbies continued to seek new interpretations of the law that would give them permission to partially return to investment banking services, until they were able in 1999 to completely overturn the Glass-Steagall Act with the blessing of a Republican Congress and Democratic President Bill Clinton. So what happened after that? The dung was blown by the fan, as the Americans say, and two crises occurred, the first small in 2000 and the second major in 2007, and both crises, in my opinion, are directly related to the violation of the Glass-Steagall Act. On September 18, 2007, the banking system stopped completely due to the lack of sufficient liquidity in the banks! Treasury staff in Washington, D.C., wept in panic and confusion. You will ask yourself, is this possible? Yes, this is what really happened in the largest economy in the world. So what happened after that? The dung was blown by the fan, as the Americans say, and two crises occurred, the first small in 2000 and the second major in 2007, and both crises, in my opinion, are directly related to the violation of the Glass-Steagall Act. On September 18, 2007, the banking system stopped completely due to the lack of sufficient liquidity in the banks! Treasury staff in Washington, D.C., wept in panic and confusion. You will ask yourself, is this possible? Yes, this is what really happened in the largest economy in the world. So what happened after that? The dung was blown by the fan, as the Americans say, and two crises occurred, the first small in 2000 and the second major in 2007, and both crises, in my opinion, are directly related to the violation of the Glass-Steagall Act. On September 18, 2007, the banking system stopped completely due to the lack of sufficient liquidity in the banks! Treasury staff in Washington, D.C., wept in panic and confusion. You will ask yourself, is this possible? Yes, this is what really happened in the largest economy in the world.<\/p>\n\n\n\n
After the economic crisis of 2007-2008 in the United States of America, which was called the Great Recession, Congress and the federal government took, once again, many precautionary measures in order to avoid a repeat of what happened. A new set of restrictions was imposed on banks and forced to be followed by all banks without exception, including increasing the percentage of funds deposited by the bank with the Federal Reserve to 10% of bank deposits, and for the Federal Reserve to conduct regular stress tests on banks and the banking sector. To measure their readiness to face any banking problems in the future. This is in addition to many other laws. Have all these measures succeeded in preventing a recurrence of the 2008 crisis? It seems, and based on the recent bank failures, that all these measures were not sufficient or effective and did not succeed in stopping the collapses.<\/p>\n\n\n\n
Does the US monetary market still need quantitative easing?
After the financial crisis in 2007-2008, the central bank introduced a new form of monetary policy called quantitative easing. It is a monetary policy measure whereby the central bank purchases predetermined amounts of government bonds or other financial assets in order to stimulate economic activity. By purchasing these securities, the central bank adds new money to the economy; As a result of this cash flow, interest rates fall, making it easier for businesses and citizens to borrow from banks. Quantitative easing has been, since 2009, the main factor providing liquidity to the US banking system. However, in 2022, the Fed has shifted its monetary policy significantly to include large hikes in interest rates and reductions in Fed holdings in order to avoid the persistent rise in inflation that appeared in 2021. One of the downsides of QE is higher inflation and currency depreciation. So what is the relationship of quantitative easing to bank failures? The lack of sufficient liquidity in the banking system makes the collapse of the bank inevitable due to the inability of the bank to borrow from other banks or sell the bank’s assets at the required speed. All phenomena indicate that the US banking system needs quantitative easing again to avoid problems related to lack of liquidity.<\/p>\n\n\n\n
Are US banks and the US economy on the verge of new crises?
This is a question whose answer is worth billions of dollars! There is a phrase that senior officials always say when an unexpected economic crisis occurs, and even President Biden used it recently. This sentence says, “The economic fundamentals are sound.” If the fundamentals are sound, why do bank failures occur, why quantitative easing, and why the rapid rate hike? In my opinion the foundations are greatly shaken; Because the foundations changed a long time ago. The United States, which was a manufacturing country, has become a consumer country, and the citizen is a debt consumer, and its banks have ceased to be a safe haven for foreign capital. In addition, the foreign trade balance is negative by hundreds of billions, and the federal government debt amounts to $31 trillion. We must not forget that the dominance of the dollar in the global economy is eroding. \u201cThe economic fundamentals are sound\u201d has become an empty phrase that verges on a sarcastic joke. So I leave the reader to find an answer to this question!<\/p>\n\n\n\n
Did the recent bankruptcies cause a loss of confidence in the US banking system?
Small bank failures in the US may make the front page of the local press but go unmentioned in the national press. The reason for this is that the Federal Deposit Insurance Corporation’s acquisition of failed banks is going through quite quietly. The corporation guarantees deposits of up to $250,000, and keeps the original employees until it completes the bank’s liquidation process. But when a bank collapse makes a big noise, as happened with the collapse of the three banks last week, the confidence of the American public weakens, and it is possible that some of the faint of heart withdraw their deposits. If the deposit is more than 250,000 dollars, the part above this limit is not compensated by the Federal Deposit Insurance Corporation, but the US government decided this time to cover the entire deposits of Silicon Valley Bank, because many of the depositors are emerging companies that cannot afford to lose most of their deposit. And it is possible to collapse and unemployment of its employees.<\/p>\n\n\n\n
Is the impact of raising the interest rate on banks and inflation?
Over the past year, the Federal Reserve has gradually raised the interest rate from 0.5% to 4.75% under the pretext of curbing inflation, which has reached an annual rate of about 10%. This rate of inflation is considered high and leads to economic and social problems. However, raising the interest rate to this extent is considered a form of delirium in fiscal policy. If the government numbers are correct, inflation is now 6%. Did the interest rate hike really affect inflation? The answer to this question has not yet been decided. But what did the interest rate hike do to the banks? The directors of the Silicon Valley Bank blame the Federal Reserve for the collapse of the bank because the interest rate hike led to a huge loss in the bank’s investments. In addition, raising the interest rate led to a drop in the prices of the digital currency, and this is the reason that is being discussed for the collapse of Signature Bank and Silvergate Bank.<\/p>\n\n\n\n
The collapses that occurred in the past week are evidence that the laws passed after the collapses of 2007-2008 did not regulate banking behavior properly. Here we are facing a group of recent collapses that could have been avoided. This begs the question whether US legislators are unable to resist the banking lobbies and enact laws that guarantee sound banking practices and the continuation of banks without problems. Without effective laws and without efficient oversight, we will be on the cusp of the falafel banking system in the United States (with all due respect to falafel)?! I suspect that the recent bankruptcies are evidence of a serious problem (or problems) in the US banking system<\/p>\n","protected":false},"excerpt":{"rendered":"
DR.. MUNES ABU ASAB Bethesda, Maryland Across the United States and even abroad, there was a sense of stupor and disbelief after the announcement of the bankruptcy of Silicon Valley Bank last week, and the subsequent bankruptcy of two other banks: Signature Bank and Silvergate Bank. ). The bankruptcy of Silicon Valley Bank was a shock […]<\/p>\n","protected":false},"author":1,"featured_media":266,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"pgc_sgb_lightbox_settings":"","footnotes":""},"categories":[1],"tags":[],"class_list":["post-399","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-uncategorized"],"_links":{"self":[{"href":"https:\/\/wordpressf.goigi.biz\/arab\/wp-json\/wp\/v2\/posts\/399","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/wordpressf.goigi.biz\/arab\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/wordpressf.goigi.biz\/arab\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/wordpressf.goigi.biz\/arab\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/wordpressf.goigi.biz\/arab\/wp-json\/wp\/v2\/comments?post=399"}],"version-history":[{"count":1,"href":"https:\/\/wordpressf.goigi.biz\/arab\/wp-json\/wp\/v2\/posts\/399\/revisions"}],"predecessor-version":[{"id":400,"href":"https:\/\/wordpressf.goigi.biz\/arab\/wp-json\/wp\/v2\/posts\/399\/revisions\/400"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/wordpressf.goigi.biz\/arab\/wp-json\/wp\/v2\/media\/266"}],"wp:attachment":[{"href":"https:\/\/wordpressf.goigi.biz\/arab\/wp-json\/wp\/v2\/media?parent=399"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/wordpressf.goigi.biz\/arab\/wp-json\/wp\/v2\/categories?post=399"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/wordpressf.goigi.biz\/arab\/wp-json\/wp\/v2\/tags?post=399"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}