U.S. Banking System in 2023: Are We Going Towards A New Crisis?

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The current situation of the U.S. banking system raises questions among investors and depositors. 

The collapse of Silicon Valley Bank and the plunge of financial institutions’ stocks like First Republic bank are the results of an uncertain economic situation, increased activity of regulators, and the nervousness of investors. 

The recent speech of U.S. president Joe Biden helped to lessen concerns, but doubts about the future of the U.S. banking system are still strong. 

According to economists like Paul Krugman, 2023 won’t represent a new 2008. Despite this, the banking system of the country might require different solutions. 

Recent events that affected the U.S. banking system

The boom of fintech stocks during the pandemic led to a favourable economic and financial framework globally. 

After an increased hiring activity and hyped funding rounds, the whole tech sector needed to rebalance its finances and business models. 

Regulators became more severe for what concerns control – especially after the collapse of FTX – and the Fed took measures to face the rising inflation. 

The raised interest rates strongly affected the tech and fintech industry which mainly relies on convenience and agility – favoured by a regulatory framework that is not as strong as the one reserved for traditional financial institutions. 

Silicon Valley Bank was one of the firms affected by the strict measures: mainly focused on financing tech startups, SVB was both hit by its management – especially because some of its clients were uninsured – and by the high interest rates that forced the bank to sell its investments at a discount to meet clients’ requests after the general panic caused by uncertain economic conditions. 

In a joint statement, the Fed, the Treasury Department and the FDIC announced on Sunday the closure of Signature Bank, a top lender in the crypto industry, to avoid systemic risk. 

Was this a bailout?

Regulators had already shut down Silicon Valley Bank on Friday, and gave its control to the FDIC. 

This represents the worst bank failure after the financial crisis of 2008. 

After the failure, president Biden spoke to reassure investors: depositors would have access to their money, and he called for stronger regulations concerning the banking system. 

The speech helped the stock market to bounce back after a dramatic Monday, but doubts arose about a possible bailout. 

According to experts, the measures taken by the U.S. government actually represent a bailout. 

The Fed announced special measures to support banks exposed to a possible risk by lending them money at special conditions. 

This measure was exceptional and will be possible by raising fees charged to banks. All these elements allow us to consider this a bailout. 

This can avoid further failures and markets responded well, but the alarm bell is still ringing.  

Despite special measures, the possibility of a recession – especially during the second half of 2023 – is still a reality. 

In the meantime, Tim Mayopoulos – the new CEO of what is now known as SVB Bridge Bank – is asking investors to bring their money back.

The future of the banking system

The major concerns are related to the possibility of a systemic risk that could lead to a dramatic domino effect.

Despite the unlucky conjuncture of the events that led to the current issues of the banking system, financial institutions still have the tools to face global challenges. 

According to a recent report published by Deloitte, a global consulting firm, the future of banking should mainly rely on resilience, flexibility and a stronger focus on customers – characteristics that are usually associated with fintechs more than with traditional banks. 

The Deloitte Center for Financial Services also analysed the main sectors that can shape the future of the banking system in 2023 and the next years. 

Retail banking, consumer payments, wealth management, commercial banking, transaction banking, investment banking and market infrastructure: all these types of businesses can shape the future of the banking system by focusing on customers – also by providing them with stronger support, especially during tough economic times, offering multiple and innovative payment methods, democratising wealth management. All in the spirit of inclusivity, sustainability, flexibility – and regulation. 

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