Looming crisis: The US banking sector faces potential collapse

The U.S. banking industry faces growing challenges amid growing insolvency concerns

The latest quarterly report from the Federal Deposit Insurance Corporation (FDIC) clearly demonstrates the troubling state of the U.S. banking sector. The report shows that 63 banks were preparing for bankruptcy in the first quarter of 2024, compared to 52 in the first quarter, signaling a worsening scenario.

Notably, the report further highlights that banks collectively recorded unrealized losses of $517 billion, an increase of $39 billion from the previous quarter. This trend has continued for 9 consecutive quarters, which is attributed to excessive unrealized losses resulting from the fact that the Federal Reserve began to raise interest rates in 2022.

An additional challenge is the recent discontinuation of the Bank Term Financing Program (BTFP), which is halting the submission of new mortgage loan applications and worsening an already precarious situation for banks. The transfer follows a disaster over the past 12 months, which saw banks such as Regional Signature, Silvergate and Silicon Valley collapse as potential customers rushed to withdraw their deposits.

The closure of the BTFP, coupled with excessive interest rates and operating points, has raised fears of a possible liquidity disaster, harking back to the 2008 global monetary meltdown. In the future, there may be a cascading impact of financial institution failures, affecting financial progress, creditworthiness and employment costs.

Analysts forecast a growing chance that more than 50 U.S. banks will default, given concerns about declining earnings, higher loan prices and potential capital outflows. Despite post-2008 regulatory reforms, the sector remains weak in the face of systemic challenges, requiring vigilance and proactive measures to protect the monetary stability of the banking trade.

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