Understanding the Risks: The Threat of Bank Runs in the United States
The Underlying Causes of Potential Financial Instability
The recent collapse of Silicon Valley Bank (SVB) has shed light on potential vulnerabilities within the United States banking system. The attempts by the Federal Reserve to mitigate inflation have inadvertently left financial companies particularly exposed to losses, especially those associated with bond holdings. In a report by Sputnik World on November 11, 2023, it was highlighted that the foundation of the US banking sector might be more fragile than previously thought.
Unrealized Losses: A Financial Time Bomb?
A concerning revelation from a Moody’s report indicates that several of the United States’ largest banks are currently sitting on approximately $650 billion in unrealized losses. These losses represent assets that have declined in value, but have not been sold off by the banks. Financial expert Aquiles Larrea provided insights to Sputnik, explaining that while such fluctuations in asset values are not atypical, they can spell disaster for financial institutions if those assets must be liquidated at a loss.
The Danger of a Bank Run
The perilous nature of these conditions becomes starkly evident during a bank run, an event which compels banks to realize these losses, thereby cannibalizing their own financial stability. Larrea pointed to SVB’s collapse as a prime example of what can occur when a bank needs to offload assets in an unfavorable market. He noted, “Let’s just take the simplest example: a $1,000 bond suddenly becomes a $700 bond. That’s a huge loss. It’s a 30% drop. So bank assets are down 30%, which is not unheard of. That has happened. But in general, the banks do not survive.”
The Role of the Federal Reserve and Interest Rates
Furthermore, the role of the Federal Reserve in this dynamic cannot be understated. When interest rates were raised, the banks’ holdings in U.S. Treasury bonds, such as those held by SVB, plummeted in value. Larrea remarked, “People forget that bonds will go up and down daily. It’s a much bigger market than the stock market. It dwarfs the stock market as a whole. But you have to remember that they go up and down. And if at any given time there was a bank run, that’s when your money would be most affected.”
Moral Hazards in Banking Practices
The SVB case also brought to light the moral hazards in banking practices. It was alleged that SVB executives took bonuses for themselves shortly before the bank’s collapse—an action that has been described as bordering on criminal by financial analysts. This highlights the need for more scrutiny and regulation of bank management practices to protect depositors and the overall economy.
Concluding Thoughts on Financial Stability
The health of the US banking sector is tied to the valuation of assets that can fluctuate unexpectedly, creating potential for future bank runs and financial crises. While regulatory bodies and the Federal Reserve work to prevent such occurrences, the complex interplay of markets, interest rates, and banking practices means that vigilance is paramount. Depositors and investors alike should remain aware of the systemic risks highlighted by experts, bearing in mind the inherent volatility in even the most seemingly stable of financial assets.
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This article was based on information reported by Sputnik World and the views expressed by financial expert Aquiles Larrea.