The recent US bank failure has once again thrust the crisis surrounding the US banking system into the spotlight, leaving the public dismayed by the intensified pressure on commercial banks instead of a relief. A survey by the Federal Reserve reveals that a staggering 50.8 percent of US banks have tightened terms on commercial and industrial loans for medium-sized and large businesses in the second quarter, up from 46 percent in the previous quarter.
This tightening credit situation reflects the mounting pressure faced by the banking system, rendering small and medium-sized US banks increasingly vulnerable to risks. For example, the recent closure of Heartland Tri-State Bank of Elkhart, Kansas, a lender in the state of Kansas, has raised concerns about the stability of the US banking sector.
The crisis affecting small and medium-sized US banks shares a common thread – it is not solely due to poor risk management but, more fundamentally, it can be attributed to successive interest rate hikes by the Federal Reserve. With the central bank raising interest rates for the 11th time since March 2022, bringing the benchmark rate to its highest level in 22 years, banks are grappling with high deposit-side costs and liquidity crunches.
While the Fed introduced the Bank Term Funding Program to provide emergency liquidity to US depository institutions, it appears to be only a temporary solution and cannot address the fundamental challenges faced by the banking system. Liquidity pressure on banks continues to rise, as evidenced by the $78 billion drop in deposits at the largest US banks in the latest reporting week.
Despite claims from the Fed that the US banking crisis has subsided, many regional commercial banks still rely on emergency lending from the central bank. Given the likelihood of interest rates remaining high in the short term, small and medium-sized banks may face even more challenging circumstances, and the risk of further bankruptcies looms.
Considering the brewing risks and ongoing problems, investors and depositors, particularly those from China, are advised to exercise caution when dealing with US banks. Chinese customers of Silicon Valley Bank (SVB) have learned a harsh lesson, as the Federal Deposit Insurance Corp (FDIC) seized their deposits in Asia, leaving them with outstanding loans to First Citizens Bank and unprotected deposits in SVB’s branch in the Cayman Islands.
In light of the mounting pressure on the US banking system, Chinese companies with deposits in US banks should remain vigilant and take precautionary measures against potential risks. The situation calls for careful consideration of deposit and investment arrangements with US banks to protect assets from any potential fallout.
As the crisis surrounding the US banking system continues to deepen, it is becoming increasingly evident that the aftermath of the most recent US bank failure has not brought the expected relief. On the contrary, the pressure on commercial banks has intensified, sparking growing concerns among the public and investors alike.
A recent survey conducted by the Federal Reserve highlights the worrisome trend of US banks tightening terms on commercial and industrial loans for medium-sized and large businesses. The proportion of banks doing so has risen to 50.8 percent in the second quarter, up from 46 percent in the previous quarter. This tightening credit situation not only indicates the precarious state of the banking system but also puts small and medium-sized US banks at a higher risk of financial instability.
One notable example of the escalating crisis is the recent closure of Heartland Tri-State Bank of Elkhart, Kansas. Despite being the smallest of the five US banks that have collapsed this year, its failure serves as a stark reminder that the troubles facing the US banking system are far from over. Investors and depositors are now grappling with uncertainty, questioning whether this latest development will lead to a new round of financial turmoil in the US banking sector.
At the heart of this crisis lies the issue of interest rates. The Federal Reserve has raised interest rates relentlessly since March 2022, culminating in the highest level in 22 years – a range of 5.25 percent to 5.5 percent. The impact of these rate hikes has led to soaring deposit-side costs and a liquidity crunch for banks across the nation.
Although the Fed introduced the Bank Term Funding Program to provide emergency liquidity to US depository institutions following the collapse of Silicon Valley Bank (SVB), it is evident that this measure has only served as a temporary fix and failed to address the fundamental challenges plaguing the US banking system. Liquidity pressures continue to mount, exemplified by a significant $78 billion drop in deposits at the largest US banks during a recent reporting week.
Contrary to the Fed’s assertions that the crisis has subsided, many regional commercial banks still heavily depend on the central bank’s emergency lending. With interest rates not showing signs of decline in the near future, small and medium-sized banks face an increasingly precarious situation, with the possibility of further bankruptcies looming on the horizon.
The article also advises investors and depositors, particularly those from China, to exercise caution when dealing with US banks. The FDIC’s seizure of SVB’s customers’ deposits in Asia and their unprotected deposits in the Cayman Islands serves as a stark warning to Chinese companies and depositors about the risks involved. As the pressure on the US banking system continues to escalate, a prudent and vigilant approach to investment and deposit arrangements with US banks becomes more critical than ever.
In conclusion, the deepening crisis in the US banking system demands serious attention from regulators, investors, and depositors. With the risks and uncertainties still on the rise, a cautious approach and proactive measures are essential to navigate the turbulent waters of the US banking sector.
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