Why are American banks going bankrupt?

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All major American banks have stepped in to save First Republic Bank America from bankruptcy.

According to the AFP news agency, due to this, these fears have now decreased First Republic Bank A US regional bank could be the next to suffer bankruptcy.

Earlier, Silicon Valley Bank and Signature Bank have gone bankrupt in the US.

A consortium of 11 US private banks has announced that they will deposit $30 billion into First Republic Bank.

In these banks Bank of America, Citigroup And The JP Morgan thing are also included.

All of these big banks have come out dramatically to support the US banking system after three mid-sized banks went bankrupt last week.

This consortium of 11 American banks has said in its statement that ‘This action by the largest banks in the United States shows that they trust banks of the size of First Republic Bank. We are all putting our financial strength and capital into the larger system where it is most needed.’

Despite all this, First Republic Bank shares fell 17 percent on the American stock exchange on Thursday.

This relief given to First Republic Bank in the form of 30 billion dollar deposit could not maintain its effectiveness much.

Earlier, the bank’s shares rose 10 percent after a day and stopped trading at 17 percent.

However later Market trading Shares fell sharply with 15.6 million shares traded.

Why is this happening?

According to news website Outlook India.com, the collapse of Silicon Valley Bank and Signature Bank is historic.

“These banks failed so quickly that there was a complete precedent of customers pulling their money out of the bank at the same time.”

US President Joe Biden has vowed to take action against those responsible for the banking crisis in the country.

According to Outlook Express, the cause of the banking crisis may be a deeper problem that reveals the flaws in the US banking ecosystem.

The system focuses on record inflation, questionable balance sheets and rising interest rates.

Federal Deposit Insurance Corporation (FDIC) chief Martin Grunberg last week warned of a $620 billion risk to the US financial system. By Sunday, three banks had fallen victim to the crisis. Silvergate Capital Corporation was ranked third.

This section contains related reference points (Related Nodes field).

A bank faces interest rate risk when rates rise rapidly in a short period of time. This is exactly what is happening in America.

The Federal Reserve is aggressively raising rates starting in March 2022. The Federal Reserve has raised rates by 4.5 percent so far in an effort to control inflation. The rate of interest increased accordingly.

According to the report of the Associated Press (AP), the interest rate on one-year US government treasury notes has increased significantly in March 2023 compared to the beginning of 2022.

This means that those who invest in these notes will earn more money in interest but it also means that the value of these notes has decreased.

The same has happened with 30-year Treasuries. When the interest rate on a security increases, its value decreases. A sharp rise in interest rates can also cause a decline in the value of debt that was previously issued (such as corporate bonds or government debt). This can cause a sustained reaction in the market.

In simple words, interest rate The risk that the security’s market value declines is not a major problem as long as the owner can hold it until maturity, at which point he will be able to withdraw his principal without any loss. Losses will remain hidden on the bank’s balance sheet and disappear over time.

How will it affect Pakistan?

According to reports, the ‘contagion effects’ of the banking collapse in Pakistan will be limited, possibly affecting tech startups and IT firms to some extent. However, if the problem spreads globally, it could limit capital flows and other emerging markets.

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