Can Big Banks stay resilient despite the Banking Turmoil?

varsha sarkar

May 22, 2023

3:28 pm

Can Big Banks stay resilient despite the Banking Turmoil?

America’s Major financial institution- Silicon Valley Bank has financially collapsed. This is said to be the biggest banking failure in American history since 2008 when the Washington Bank collapsed and caused a recession in the entire world.

The Collapse of Silicon Valley Bank has sent shock waves across the financial business world. It is the epicenter of start-ups and even some of the world’s most prominent start-ups.

In this article, we will learn how the banking system works, what are the reasons behind the collapse of America’s major banks, and how Big Banks stay resilient despite the Banking Turmoil.

How Does the Banking System Work?

Banks handle the movement of money between individuals and businesses, whether they are Brick and mortar( traditional offline) branches or Online based ones. More precisely, banks provide deposit accounts, which are secure storage spaces for people’s money,  and the deposited amount by individuals or companies is used by banks to lend loans to other individuals or businesses.

In exchange, debtors pay interest on such loans to the bank. The initial deposit account holder then receives a portion of that interest back in the form of interest. Often a savings account, money market account, or certificate of deposit (CD) account receives interest. The main sources of income for banks are the interest on loans and the charges they levy on their customers.

The banks earn through these charges and they are imposed on certain items like bank accounts, SMS alert charges, or financial services. The banking industry is strongly regulated. In order to ensure that banks adhere to the necessary regulations, the Federal Reserve System regulates banks and other financial institutions and works in conjunction with state government agencies.

The origination of the Silicon Valley Bank collapse

Silicon valley bank is the 16th largest bank in the United States of America and it is the nucleus of the technology sector. By the end of 2022, it had $ 172 billion in total deposits and in just 48 Hours customers withdrew a whopping $42 billion dollars from SVB which caused the collapse.

It started during the Covid-19 pandemic when banks had more deposits than they could lend but they had to do something with these deposits so silicon valley bank invested these deposits in long-dated treasuries that are considered very safe. In the first quarter of 2020, they had worth $ 21 billion of securities and in 2022 it swelled to $128 dollars. But things started to go wrong when interest rates were rising, and treasuries became less valuable. The company started to sell those treasuries and incurred a loss of $1.8 billion. When these things were publicly revealed, customers got nervous and started to withdraw their funds, and the stocks of the bank declined. As a result, the bank could not sustain this blow.

However, FDIC which ensures deposits in American banks, came to the rescue and announced that when the bank reopens, depositors who have $250,000 or less in deposits can have complete access to their money. Any deposits made at SVB that are not covered by insurance, or which are greater than $250,000  will get a “Receiver’s Certificate” for the part of their savings that is not insured. 

Can Big Banks stay resilient despite American Banks’ collapse?

Michelle Bowman, governor of the Federal Reserve, stated that despite the abrupt failure of two major US banks, the US financial and banking systems are still “safe, sound, strong, and resilient.”

In recent days, US and European authorities implemented a number of substantial emergency measures, which seem to have stabilized the financial markets. Although this episode has shown that some changes might be necessary, Bowman said in prepared remarks, “I am not of the opinion that that the collapse of these two banks is an indictment of the broader regulatory landscape.”

Bottom Line

The Collapse of Silicon Valley banks can affect the economy and financial system of the entire world. However, big banks can remain stable, Unaffected, and resilient despite the banking turmoil in the US with the use of continuous examination of their stability and growth plans to handle the economic and financial consequences.

varsha sarkar

May 22, 2023

3:28 pm

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