Fall of Silicon Valley banks: a warning for regional banks

THE unravel of Silicon Valley Bank And THE imminent threat has regional banks

In THE recent pass, THE banking industry has has been submitted has intense meticulous examination, with regional banks landing THE the weight of THE pressure. Last year, Silicon Valley Bank, A notable regional bank, encounter A significant crisis that directed has It is fall. Currently, another regional bank, New York Community Bank, East faltering on THE edge of A similar fate. THE banks solvency doubts to have directed has A 45% dive In It is action price In A scope of two days. This situation strong points THE in progress challenges that regional banks are Fight With with.

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Understanding THE banking system

HAS fully to input THE problems that regional banks face, It is essential has to understand THE works of THE banking system. When You deposit money In A bank, THE bank typically do A of three things with that money.

First of all, they can lend he out, offer mortgages has people For House purchases Or companies For factory construction. Secondly, they can to use A portion of THE deposit has purchase obligations. Lately, THE stay East guard In in cash.

For example, consider A bank with $100 value of deposits. A typical active mix For A bank could involve ready out $85, using $5 has buy the obligations, And keeping $10 In species. This implied that only ten% of THE total deposit East guard In species, which East used has pay people When they to want has withdraw money Since THE bank.

THE profitability dilemma

Banks are confronted with A profitability dilemma. They don't do it to want A big Rising of money session In species because It is not profitable. THE money It is lent out And THE obligations they buy generate profits. SO, they prefer has allocate A upper percentage of THE money has these two categories.

In A typical economic environment, keeping ten% of THE deposit In species East sufficient has meet every day withdrawals. In comparison, THE remaining 90% can be used has generate profits For THE bank And It is shareholders.

THE issue of increase withdrawals

THE issue jumpscares When banks confront increase withdrawals. This could be due has people withdraw money because their paycheck is not it keeping up with inflation Or because they to want has take advantage of better opportunities somewhere else. When This arrived, THE Rising of species on hand decreases, force THE bank has look has other sources has generate a few money.

Traditionally, banks to have sold their obligations has generate species because THE money lent out East illiquid. However, THE current economic climate has complicated This strategy. THE Federal Reserve has increase interest rates has It is the fastest pace In 40 years. From interest rates And bind prices to have A reverse correlation, THE increase In interest rates has directed has A decrease In bind prices. This means that banks can't sell their obligations For THE price they initially thought they were worth it.

THE impact of delinquencies In commercial real domain

Further composition THE banks' misfortunes East increase commercial real domain business delinquencies. Almost all commercial real domain properties to have floating rate mortgages. SO, When THE Federal Reserve increase interest rates, THE mortgage Payments become more dear.

Consider THE case of A desk building owner with A occupation rate of 85% In THE post-COVID Work at home world. With rents decreasing And mortgage Payments increasing, THE owner East In A difficult situation.

HAS mitigate THE risk of bad the loans, banks must together next to more money For ready loss reserves. This East basically insurance against bad loans.

THE pressure on banks

As A result of THE Federal Reserves historical interest rate increase, banks are below pressure. They are losing money on their deposits And the obligations, And they to have A low quality book of loans.

In conclusion, regional banks are focused towards significant challenges. THE fall of Silicon Valley Bank And THE imminent threat has New York Community Bank are rigid reminders of THE problems tormenting THE banking industry. Understanding these problems East crucial For anybody implied In THE financial sector.

Frequently Request Questions Q. What directed has THE fall of Silicon Valley Bank?

Silicon Valley Bank encounter A significant crisis that directed has It is fall. This was due has intense meticulous examination And pressure on THE banking industry, particularly regional banks.

Q. What are THE three things A bank typically do with deposit ...