In-depth analysis of the causes, impacts, and solutions to the 2023 US banking crisis
Analysis of the 2023 US banking crisis, including causes, impacts, and solutions.
Translated by: Block Knight
By 2023, banks in the United States will experience a collapse about once every 90 days. Regional and smaller banking institutions in the United States will be hit hard by deep-rooted vulnerabilities, regulatory errors, market instability, risk management failures, and other factors. This will cause chaos in regional and global financial markets. This article will delve into the reasons, impact, and possible solutions to the 2023 banking crisis.
The following is a table of contents for this article:
What is the 2023 Banking Crisis? Timeline of the US Banking Crisis
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Causes of the 2023 Banking Crisis
Impact of the 2023 Banking Crisis
The Role of Technology and Social Media in the 2023 Banking Crisis
Responding to the 2023 Banking Crisis: Solutions?
Lessons Learned from the 2023 US Banking Crisis
Economic Recovery After the US Banking Crisis
Crisis or Cure: What are the Long-term Prospects?
I. The 2023 Banking Crisis
The 2023 banking crisis refers to the sudden collapse of regional banks in the United States that has a serious impact on the global banking industry, although this type of collapse is somewhat predictable. A series of bank failures creates a domino effect, and this crisis differs significantly from the 2008 financial crisis, which primarily affected Wall Street giants. This crisis renders the phrase “too big to fail” meaningless, as large banks like Lehman Brothers and Bear Stearns cannot withstand the storm.
2008 US Banking Crisis: FDIC
This US banking crisis affects smaller financial institutions such as Signature Bank, Silicon Valley Bank, Silvergate Bank, and First Republic Bank.
2023 US Banking Crisis: FDIC
2. Timeline of the US Banking Crisis
Although the US banking crisis was primarily focused in 2023, a broader timeline can be traced back to 2019. Let’s take a closer look:
1. 2019 and early warning signals
The Fed changed stress test norms or bespoke rules for banks, lowering liquidity standards for institutions holding less than $100 billion in assets. We’ll see how this further fueled the spread of the banking industry in 2023.
2. October 2022 triggers a chain reaction
Global interest rates soar, making borrowing even harder for banks and investors. This was the first spark that ignited the “crisis.”
3. January 2023
Banks like FRB and Signature Bank begin to see massive fund outflows as investors start withdrawing capital for standard operations. This further exacerbates the instability of the financial market, with early signs of a liquidity crisis appearing.
By this point, rising rates have already had a negative impact on bond yields, causing bond-heavy banks like SVB to suffer unrealized losses. And a liquidity crisis means they can’t even sell investments to offset the outflows. The situation begins to deteriorate.
4. March 2023
On March 8, Silvergate Bank had to announce the closure of its business as it couldn’t meet withdrawal demands. Silicon Valley Bank also announced its $1.8 billion loss as it had to sell part of its bond dedicated investments to meet the increased demand for withdrawals. After this news came out, SVB Financial, the parent company, was downgraded by Moody’s.
2023 Banking Crisis and SVB stock drop: World Economic Forum
On March 9, 2023, SVB’s stock price plummeted. This also caused a combined market cap loss of $52 million for Bank of America, JPMorgan Chase, Citigroup, and Wells Fargo. And on March 10, regulators announced the takeover of SVB, putting it in the same position as Silvergate. In addition, on March 12, regulators took over Signature Bank, making the concern over systemic risk real and legitimate.
However, on March 12, 2023, regulators announced that customers of affected banks would receive refunds of their deposited funds. Some startups also struggled to raise funds to manage their daily operations on March 11th and 12th. In addition, a new loan program focused on banks emerged, which we will discuss later.
5. 2023 Bank Crisis Spreads, Mid-March
On March 15, 2023, this crisis began to spread outward (across the Atlantic), and Credit Suisse’s stock price hit a new low. The stock prices of European banks such as BNP Paribas and Deutsche Bank also fell. While three banks had already collapsed, at this time, we saw the credit rating of First Republic Bank downgraded to “junk” status by S&P Global Ratings.
2023 Bank Crisis and S&P 500 Fall: Meeting Committee
On March 17, 2023, SVB Financial filed for bankruptcy protection. From March 18th to the 27th, UBS acquired Credit Suisse. JPMorgan plans to stabilize First Republic Bank, which unexpectedly rose by 30%, and the US Federal Deposit Insurance Corporation (FDIC) mentioned that most of SVB’s assets will be transferred to First Citizens BancShares.
6. April 2023
April is characterized by First Republic Bank’s impending bankruptcy. First, the bank suspended dividends and mentioned that its deposits had decreased by about $100 billion in March. In April, First Republic Bank’s stock price began to plummet.
7. May 2023
On May 1, 2023, regulators took over First Republic Bank. Subsequently, other regional banks such as First Horizon and BlockingcWest also had a domino effect, with the latter reporting a 9.5% drop in the value of its deposits on May 11.
A timeline of the Bank of America crisis: The New York Times
Financial experts on Twitter believe that the banking crisis is not yet over and that there are many unstable factors in the market. Others believe that this crisis may be intentional, as a way to organically introduce central bank digital currencies (CBDCs) into the economy. However, all of these are speculative views.
III. Causes of the 2023 Banking Crisis
The causes of the 2023 banking crisis cannot be attributed to a single factor. Some experts even refer to it as a bond crisis, or even a sovereign debt crisis, rather than a true banking crisis.
“A bond crisis is not just a banking crisis. A sovereign debt crisis is not just a bond crisis.” Balaji Srinivasan, former CTO of Coinbase: Twitter
Let’s delve deeper and better understand these reasons:
1. Global “economic” environment
The global growth rate has slowed since the pandemic. From cryptocurrencies to stocks, every high-beta asset entered a bear market phase in 2022. Although it brought many consequences, the most alarming thing is the sudden drop in interest rates associated with long-term debt securities or bonds.
The drop in long-term bond yields has led to a huge erosion of value in bank investment portfolios like Silicon Valley Bank, which has significant exposure to these long-term bonds.
For those who are unfamiliar, inflation is usually associated with rapid financial growth, driving up the value or interest rates associated with long-term bonds. As the Fed, the EU, and other global institutions begin to raise interest rates in response to inflation – during which the economic growth rate is lowered – long-term bond yields fall, and the value of bank investments also falls. When banks have to cash in these investments at a loss due to rapid withdrawals (also due to rising interest rates), the situation quickly deteriorates.
2. Regulatory negligence and barriers
The 2008 financial crisis led regulatory agencies to implement the Dodd-Frank Act, which restricted banks from using investor funds for speculative investments through the Volcker Rule, and established the Financial Stability Oversight Council and the Consumer Financial Protection Bureau.
Although we need to separately explain all aspects of the Dodd-Frank Act in detail, it is important to know that factors such as inconsistency with the vertical area of the Act (such as the Volcker Rule), inadequate enforcement, and limited space for small banks led to the 2023 US banking crisis.
3. Financial markets and instability
As mentioned earlier, fluctuations in bond interest rates make banks fragile. Banks like SVB invested heavily in government-supported long-term bonds, and rising interest rates made the return on these bonds lower. As banks suffered investment losses, investors quickly withdrew their deposits, causing a bank run, which is detrimental to the health of the economy. Banks ultimately had to sell these bond investments at huge losses, leading to regulatory problems and bankruptcies.
4. Fragility related to banking business
Although this is just speculation, it can be seen in hindsight that there were various vulnerabilities in banking business before 2023. These vulnerabilities included battered banks having significant exposure to speculative investments, excessive risk-taking, and problems related to the freeze of interbank funding. These problems made it difficult for banks to meet withdrawal requests. In addition, this even led to the problem of “systemic risk,” making various threats gradually apparent.
5. Rapid interest rate hikes and monetary policy mistakes
Although we have discussed this issue before, it is worth reiterating it here. Since 2022, we have seen interest rate hikes globally to address inflation issues.
Raising interest rates to address inflation: Statista
All of these make borrowing more expensive, causing significant damage to startups and having a more serious impact on banks as they see a series of withdrawals. Although interest rate hikes driven by the Fed were partly in response to the threat of “rising prices,” speedy and poorly communicated interest rate hikes are often referred to as monetary policy mistakes. These mistakes can become a catalyst for driving the 2023 banking crisis.
2023 Bank Crisis and Investor Confidence Slump: Insider Intelligence
6. Risk Management and Control Errors
Banks often operate in risky areas, which highlights the importance of risk management. During the 2008 financial crisis, one aspect of risk management was strictly monitored – the assessment of borrowers’ creditworthiness. In 2023, another risk control and management error will be overexposure to long-term debt securities.
Now that we know the reasons for the crisis, let’s take a look at its impact.
Bankruptcy of 2008: World Economic Forum
4. The Impact of the 2023 Bank Crisis
The US bank crisis has had wide-ranging effects, not limited to the national banking industry. Here’s how the situation unfolded.
1. Global Economy and Impact
Some countries, such as Germany, have experienced negative GDP growth for several months, indicating an economic recession. Some European banks, including Credit Suisse and Societe Generale, have had to bear the impact of the 2023 bank crisis.
That’s not all. Here are other areas that may be affected by this ongoing crisis:
Market volatility: According to the Merrill Lynch Option Volatility Index (MOVE Index), bond markets still exhibit high volatility after the bank crisis.
MOVE index during 2023 bank crisis: Conference Board
Credit tightening: As credit tightening persists and even banks scramble for funding, credit tightening on the US coast may have a global economic impact, especially on developing countries dependent on external financing.
Decline in enterprise-specific investment: With inflation becoming a global issue, it is expected that the US will take measures to limit spending, which may slow down global corporate investment.
Compared with the global economy, the impact of the 2023 banking crisis on the US economy appears to be more direct. The following are possible consequences:
Even the economists at the Federal Reserve predict that a recession is looming in the US market as banks go bankrupt, credit channels are blocked, and government debt increases. This expectation or concern was emphasized at the March monetary policy meeting.
3. Unemployment rate
The US unemployment rate is currently low, which is good news in the banking crisis, right? However, data shows that once the credit tightening cycle begins, the unemployment rate typically takes about 14 months to peak.
Federal Reserve tightening cycle and unemployment rate: Twitter
It should be noted that a recession often inadvertently occurs after the lowest point of unemployment (local bottom). This is indeed a lagging indicator.
Although the inflation rate in April 2023 dropped to below 5%, concerns about inflation have not dissipated. As the debt crisis gradually emerges, currency printing seems to be an option, and the core inflation rate may still be in trouble. But this may be a double-edged sword. The banking crisis may reduce people’s purchasing power, and rising prices may further reduce consumer spending. This could have a greater impact on the economy.
5. Increasing debt
The 2023 banking crisis may increase national debt, which is a way to offset the economic instability caused by bank collapses. And it looks like we’ve reached the debt ceiling.
The United States hit the debt ceiling during the 2023 banking crisis: Committee
5. How did financial institutions get affected?
Even though four banks seem to have already gone bankrupt, the crisis may not be over yet. Financial institutions may still be experiencing the following effects:
1. Bankruptcy and rescue
The collapse of most banks is due to shrinking profit margins, deposit outflows, and poor risk control. These factors may cause other banks that are still operating to be concerned. In addition, these concerns may shake investor confidence, putting other banks at risk of bankruptcy.
Lowering bank deposits: conference committee
2. Resource shortage
The US banking crisis has tested the staffing capabilities of institutions such as FDIC, which has been in a passive state since then. Any additional burden may affect the resolution process and exacerbate the impact of this ongoing crisis.
6. Effects on individuals and businesses
Evaluating the impact on businesses and individuals may be more challenging. However, the following are the most concerning aspects:
Little access to credit in the form of loans.
Decreased investment may lead to lower exposure to high-risk assets such as stocks and cryptocurrencies.
Uncertainty is becoming widespread among businesses due to reduced consumer spending.
Although the impact may be speculative, the relevant concerns are real.
7. The role of technology and social media in the 2023 bank crisis
Social media and technology played a role in triggering the US banking crisis. The following are the specific impacts:
The modern era has witnessed the connection of capital between global banks. Therefore, when large regional banks in the US fail, most global financial institutions feel the shock. Some basic technologies responsible for communication between banks include SWIFT (Society for Worldwide Interbank Financial Telecommunication) and cloud computing for the unfamiliar.
In addition, it is worth noting that some tech startups (such as Roblox and ROKU) are associated with SVB, leading investors to lose confidence in the entire industry. Even cryptocurrencies have attracted expert attention, with some believing that banks’ exposure to blockchain-based assets is one of the causes of the crash.
ROKU three-month price trend chart: Investing.com
Social media also added fuel to the entire chaos, with experts and influencers sharing casual theories about the crisis. All of this played a role in the feedback loop, further exacerbating the crisis.
VIII. Measures to be taken to solve the 2023 banking crisis
Solving the negative impact of the 2023 banking crisis may not be that simple. Multiple institutions – financial institutions, government and Federal Reserve systems, businesses, and international organizations – need to work together.
The following are some possible measures currently being taken:
1. How can financial institutions help?
Financial institutions, especially banks, can focus on risk management in the future. Improving liquidity management, using diversified sources of funds, holding high-quality liquid assets (HQLA), better predicting cash flows, and establishing adequate liquidity buffers are some feasible strategies.
The Federal Reserve and the government have taken some coordinated measures to minimize the impact of the banking crisis. These include:
2. Bailout plan
Unlike previous crisis events, closed banks did not receive direct assistance. Instead, the focus was on helping depositors, with support from the Federal Deposit Insurance Corporation (FDIC). One example is that the FDIC used the Systemic Risk Expectations (SRE) to focus on Signature and SVB, giving reserve equity to uninsured depositors. Although there was $400 billion in loan outflows, there was no direct bank bailout, but measures were taken to protect depositors.
2023 Banking Crisis and Loan Model: Conference Board
3. Policy changes
One of the most important policy changes in the ongoing crisis wave is the introduction of the BTFP or bank term funding rate. This policy, led by the Federal Reserve, focuses on improving bank-related liquidity by providing one-year mortgage loans. However, BTFP is more like the government’s response to the liquidity crisis than direct bank bailout.
During the banking crisis of 2023, the nature of credit: World Business Council for Sustainable Development
4. Stress testing
The stress test scenario for the Fed in 2023 was released well before the crisis officially surfaced. The set of tests will run from the first quarter of 2023 until 2026, focusing on 28 variables. Although the Fed has included the so-called “interpretive market shock” in the test scenario, it has not actually considered rapid rate hikes. Now, as the impact of the crisis spreads, new stress tests or scenarios to locate capital structure vulnerabilities may emerge.
In addition to the above solutions, here are some other methods that may already be in place:
5. Support from international central banks
- Individuals and businesses adopt cryptocurrencies to minimize bank risk
- Adopt digital payments and other types of digital technology at the individual and corporate level to reduce over-reliance on the banking system
Global financing pressure remains low: World Business Council for Sustainable Development
IX. Lessons learned from the US banking crisis of 2023
The banking crisis of 2023 was not only an eye-opener, but also a real-life test, from which we learned the following lessons:
1. Financial market and banking reform are critical
The collapse of the banking industry exposed regulatory loopholes and inaction. The concept of asset-liability term emerged due to the long-term decline in bond interest rates, which opened up a new door to liquidity management. One thing everyone has learned is that investing too heavily in one industry or sector is never a good thing for a bank. Finally, only strict financial reform can eliminate all the above problems.
2. Economic resilience is critical
Regardless of how reform is carried out, everything boils down to the bank’s ability to withstand shocks such as bank runs. When withdrawal requests start pouring in, everything starts to fall apart, which is where even banks need to understand that investing in only one asset class is not a good practice. It is also worth noting that the introduction of BTFP is a step towards establishing economic dependence.
In addition to these important lessons, the crisis even highlighted the role of technological adaptation, which may include using machine learning and artificial intelligence for risk assessment.
10. Economic Recovery after the US Banking Crisis
What else can the government, the Federal Reserve, and policymakers do to promote economic recovery remains to be seen, but here are some ideas that may already be in the works:
- Strengthening the banking space
- Raising interest rates more cautiously
- Restoring people’s confidence in the banking system
- Stimulating economic trends through relevant fiscal policies
- Promoting overall financial stability through international cooperation
Despite the decline in systemic risk concerns over the 2023 banking crisis, the pressure on financial markets is still not easing: the World Business Council for Sustainable Development
Finally, it is most important to increase transparency and focus on the bank’s balance sheet, which is the issue that the “explanatory market shock” stress test scenario aims to consider. In addition, the banking industry seems to still be somewhat unconventional, and it may be premature to say that the banking crisis has ended.
11. Crisis or Healing: What is the Long-Term Outlook?
Whatever method is taken, it all comes down to building a strong financial system. The worst part of the 2023 banking crisis may be over, or it may not have arrived yet. It is worth noting that as of the end of May and early June 2023, the pressure on financial markets has not subsided, and credit spreads are still small. While interest rate hikes continue, the Federal Reserve seems to be cautious about such measures. However, the 2023 U.S. banking crisis is a highly complex space, covering issues such as bond interest rates, interest rates, credit limits, and bank runs.