Three banking institutions have been in difficulties in recent days in the United States, which has put many customers and investors on edge. And although there is still no talk of a financial crisis, like the one in 2008, there is a fear that it could happen again. Given that financial institutions such as Silicon Valley, Signature y First Republic Bank have revealed their financial difficulties. This has set off the alarms of the U.S. government and insurers, who are trying to stop the chaos caused. In that sense, today we will explain the preamble of these scenarios, and why are banks failing in the United States?

What happened to Silicon Valley Bank?

The Silicon Valley Bank was a bank dedicated to technological investment, based on the financing of small and medium-sized companies. This financial institution had invested a large part of the liquidity obtained during the pandemic in fixed-term Treasury bonds. These bonds have been affected due to the increase in interest rates driven by the Federal Reserve. These measures have been taken to contain the growing inflation affecting the United States.

Thus, the bank began to experience a slowdown in the payment of loans, forcing them to sell the bonds at a loss, in order to guarantee the necessary liquidity to meet the demands of its depositors. In view of this situation, investment advisors recommended their clients to withdraw their capital from the bank, which generated the withdrawal of around $42 billion in a single day, and the company's shares fell by 60%. This is considered the second largest failure in the history of the United States.

What are the other banks that are failing in the USA?

In addition, there was growing uncertainty about the contagion of this situation to other regional banks. As a result, two other banking entities, the Signature y First Republican Bank became controlled by the U.S. Federal Deposit Insurance Corporation. As a result, new fears were awakened among clients and investors. As a result, in the case of Signature BankNew York state regulators will close the bank after warning that the stability of the financial system could be affected if the bank remained open, creating the third most representative failure in U.S. financial history.

On the other hand, the First Republican Bank has been able to float after 11 financial institutions decided to take a rescue measure, injecting up to $30 billion in cash. What at first failed to stop the 26% drop in the stock price in Wall Street. In addition to dragging along with it the other major banks financing their bailout.

Why are banks failing in the United States?

The main problem of these banks is to have a portfolio of clients with a lot of money. This means that these depositors are prone to failure because of all the investment risks they face on a daily basis. Boston College Law Professor Patricia McCoy, states that "this particularly volatile depositor base represents a risk for investors".

In the case of other banks such as JPMorgan ChaseIn addition, they have diversified their client portfolio, including what are called "sticky deposits". These are ordinary people who have in the bank less than $250,000, an amount that is insured by the Federal Deposit Insurance Corporation. That is why it is estimated that at least two thirds of the deposits of these failed banks were uninsured, in addition to having an unusual loan-to-deposit ratio, resulting in them having lent out more money than they received in payments and deposits.

Statements from the White House

U.S. President Joe Biden clarified that the country's financial system is not in danger, and although the domino effect does not seem to be contained, as is the case with the bank Silvergate and even other international institutions. The president has stated that "Americans can trust that the banking system is safe, and small businesses that have deposit accounts at these banks can breathe easy knowing that they will be able to pay their workers and their bills."

Recently, the government has contracted with the company BlackRock Inc. whose job is to manage the sale of $114 billion in financial instruments of the failed banks. Signature y Silicon Valley. This will benefit the customers who were affected, because other companies will take over their accounts, in order to minimize the adverse impact on the functioning of the market.

In addition, these instruments and securities of the failed banks are backed by agency mortgages and other mortgage obligations that guarantee the flow of income for the banking institutions. Thus, history repeats itself after the 2008 financial crisis, where the Federal Reserve and the Treasury Department granted contracts to BlackRock for the management of residential debts and securities.

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