High rates: how the bankruptcy of American banks could threaten the US and the world

The US authorities intend to investigate the reasons for the bankruptcy of several American banks and bring those responsible to justice.

This was announced on Monday evening, March 13, by President Joe Biden.

According to him, the management of closed financial institutions will be fired.

At the same time, all funds on bank deposits will be available to depositors if necessary, and US taxpayers will not suffer any losses due to the current situation, unlike investors.

“Investors in these banks will not be protected.

They took the risk knowing this.

When the risk is not justified, investors lose their money.

This is how capitalism works,” Biden said.

According to the head of the White House, at the moment the American banking system "is safe."

However, the opposite point of view is shared by former President of the United States Donald Trump.

In his opinion, the current situation in the banking sector could turn into an unprecedented financial crisis for the country.

“Given what is happening to our economy, and the sounding proposals for the largest and dumbest tax increase in US history, Joe Biden will be remembered as the Herbert Hoover of our time (President of the States from 1929 to 1933. - RT

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We will have a Great Depression - much bigger and more powerful than the one that started in 1929.

The proof is that the banks are already starting to collapse,” Trump wrote on his Truth Social.

Biden's speech did not inspire the participants of the American stock market either.

At the beginning of trading on Monday, the S&P 500 Banks Group stock index (reflecting the dynamics of the value of shares of the largest banks) resumed Friday's fall and at some point fell by 8.8% to 284 points.

The value was the lowest since November 2020.

Moreover, the value of securities of some credit institutions at the moment fell by 20-75%.

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In less than a week, three large banks in the US closed at once.

We are talking about Silvergate Bank (in 2022, the company's assets were estimated at $11.4 billion), Signature Bank ($110.4 billion), and Silicon Valley Bank ($209 billion).

The last two companies were in the top 30 most expensive financial institutions in the country.

This is evidenced by the materials of the Federal Reserve System (FRS), which performs the functions of the central bank of the United States.

One of the main reasons for the observed events was a record increase in the Fed's discount rate to combat inflation.

This opinion was shared in an interview with RT by the investment strategist of Arikapital Management Company Sergey Suverov.

“As a result of rising interest rates, it has become more expensive for banks to borrow money to support their core business.

At the same time, in recent years, credit institutions have been actively investing their clients' deposits in government bonds.

However, the value of these securities fell noticeably against the background of the Fed's rate hike, and banks faced significant losses,” the specialist noted.

This state of affairs provoked panic among customers.

According to analysts, depositors began to massively withdraw money from bank accounts, which only aggravated the situation for financial institutions.

“At first, the lack of funds led to too much capital outflow from Silvergate, one of the main banks for the cryptocurrency industry.

The company was the first to signal insolvency, and after it, the withdrawal of money spread to other banks from the venture investment sector (specialize in investing in startups. - RT )

by Silicon Valley Bank and Signature Bank, ”an analyst at TeleTrade told RT Alexey Fedorov.

In addition, “poor-quality risk management” in banks played an important role, says Freedom Finance Global analyst Alina Poptsova.

According to her, for example, SVB deposits were highly sensitive to changes in interest rates, and about 90% of the deposits were not insured.

At the same time, the management of the organization did not take any measures to avoid possible problems, the expert noted.

“The bank did not hedge interest rate risks, which may be due to the lack of correct risk management.

The director of risk management at SVB left his post in April 2022, while the replacement was not provided for eight months, ”said the interlocutor of RT.

Gone to print

According to Sergei Suverov, the current events could provoke a chain reaction, especially among medium-sized banks that are not among the backbone banks and do not receive significant state support.

A similar point of view is shared by the head of the analytical department of AMarkets Artyom Deev.

“The bankruptcy of Silicon Valley Bank was the largest since 2008, that's a fact.

At the same time, three banks in the United States at once have serious problems, and a dozen more financial organizations are under the threat of bankruptcy.

Moreover, blacklists of banks have already appeared in the US, which may also collapse.

There are now about 20 positions on these lists, ”Deev said in an interview with RT.

As Aleksey Fedorov said, at the end of last week, the US Federal Deposit Insurance Agency (FDIC) introduced external management in bankrupt financial institutions.

Later, the department, together with the Fed and the US Treasury, announced a series of measures to prevent the further spread of the banking crisis.

“Clients of bankrupt banks were guaranteed a full return of their deposits.

Also, more importantly, a new bank term lending program was launched, which involves the provision of funds secured by quality assets at a nominal, rather than a lower current market price.

Thus, the American authorities are trying to stop the banking crisis, which they themselves provoked, ”the specialist added.

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Moreover, as the analyst emphasized, the correction of their own mistakes by the American leadership will once again be reduced to the issue of new money.

A similar point of view was expressed on Monday by Russian Foreign Ministry spokeswoman Maria Zakharova.

“Explain how the US authorities will “maintain the stability of the banking system,” every child can: paper and paint.

They will print even more unsecured dollars, which will cause even more problems in the world, ”wrote Zakharova on Telegram.

Root of problems

It should be noted that back in 2021, against the backdrop of the consequences of the COVID-19 pandemic, inflation began to grow steadily in the United States.

Then quarantine restrictions led to interruptions in the supply of a number of products, which eventually turned into a rise in prices.

At the same time, to support the economy, the Fed printed a significant amount of money, which was not adequately backed by goods.

The situation worsened in 2022 after Washington imposed sanctions against Moscow.

In particular, the ban on the supply of energy raw materials from Russia led to a shortage of fuel in the United States and, as a result, a sharp rise in the cost of fuel, as well as a number of other goods.

Against this background, already in the middle of the year, inflation in the United States rose to 9.1% for the first time in more than 40 years, according to data from the US Department of Labor.

In an attempt to curb the record rise in prices, the US had to use its strategic oil reserves, which by now are almost half empty.

In turn, the Fed was forced to sharply tighten monetary policy (MPT).

So, over the past year, the Fed has already raised its interest rate eight times (from 0-0.25 to 4.5-4.75%) and brought it to the highest level in the last 16 years.

Traditionally, tightening monetary policy is considered one of the main tools in the fight against rising prices.

Due to the increase in interest rates, borrowed money becomes more expensive for citizens and businesses, consumer and business activity weakens, which puts pressure on inflation.

So, as a result of the actions of the Fed, by February 2023, inflation in the United States slowed down to 6.4%, but the value turned out to be somewhat worse than expert forecasts (6.2%).

Moreover, the current growth rate of consumer prices in the country is still several times higher than the Fed's target of 2%.

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In this regard, the American regulator intended to continue to raise the interest rate.

However, now a further tightening of the monetary policy may further harm the banking sector, analysts do not exclude.

“The problem is that the Fed never managed to get inflation back on target.

So now the Fed is faced with a choice: stop raising the rate and save the banking system, sacrificing the economy, or continue to raise the rate and reduce inflation, saving the economy, but sacrificing the banking sector.

The paradox is that both scenarios can result in a cyclical crisis,” Aleksey Fedorov suggested.

Nevertheless, the current situation is not yet similar to the events of 2008, Sergei Suverov notes.

According to him, at the moment there are no risks in the mortgage market in the United States, as it was before the previous crisis.

“Much, of course, will depend on the actions of the US authorities.

If the answer is quick and objective, then the problem can be solved and the domino effect can be avoided.

However, it is difficult to say what exactly the Fed will do,” Suverov said.

In his opinion, if the measures taken by the Fed turn out to be ineffective, then a banking crisis is possible, which later develops into a full-fledged financial one.

In this case, as Alexei Fedorov believes, we can already talk about a repetition of the events of 2008-2009, which will be "bad news" for the world economy.