The Banking Crisis of 2023

Introduction

If you live in California (or even if you don’t!) you probably remember the widespread panic in March as account holders withdrew thousands of dollars from financial institutions, ultimately causing their collapse. But, what does it mean for a bank to collapse? Why did it happen? And, most importantly, how does it affect U.S. consumers?

What is the Banking Crisis?

A banking crisis occurs when several banks experience liquidity (withdrawals exceed available funds) simultaneously. The ‘banking crisis’ in this article refers to the most recent in the United States. In March, 2023, three small to mid-sized banks failed over the course of five days, setting off a steep decline in global stock prices. Shortly afterwards, the Federal Reserve vowed to do all they could to ensure that all deposits at the failed banks would still be honored. Nevertheless, several global industry regulators (many centraland national banks from around the world, including the U.S. Federal Reserve) had to step in to prevent the situation from spreading and affecting more banks. Nevertheless, many experts expressed concern that it would, and still could, lead to another banking crisis and a wider destabilization of financial institutions across the country. 

What Caused the Banking Crisis?

In 2022, the Federal Reserve began raising their interest rates to counter the inflation surge that began in 2021. As a result, the value of bank capital reserves decreased, and banks began to incur losses that built up over time - losses they were hardly even aware of. The exposure of the market to cryptocurrency during the COVID pandemic of 2020 further weakened the market when the crypto bubble popped in 2022. In March of 2023, Silvergate Bank, which was heavily focused on crypto, announced its imminent shutdown due to high losses. This caused a wave of withdrawals from panicked account holders. Two days later, another wave of withdrawals happened at Silicon Valley Bank when they made their profit losses public, which ultimately caused its collapse. Another two days later, regulators seized and shut down Signature Bank, citing systematic risks, as it also relied heavily on cryptocurrency. In the aftermath, regulators also seized First Republic Bank, officially making the whole affair the second largest bank failure in U.S. history.

What Does It Mean For Us?

Certainly, a banking crisis does not seem as though it will affect the average person. After all, many of them are multi-billion dollar corporations, and even if they go under, the Federal Reserve is bound to honor their debts, right? Yes… and no. The problem with banks going under with thousands of dollars in unhonored withdrawals is that then the government is obligated to step in to bail them out, up to a certain amount. While it’s true that businesses, small and large, are more affected than consumers, there are ripple effects that will come back to bite consumers in the long run - namely, further inflation on the prices of goods and services. Since several banks have grown so large, the impact on the financial system should they crash is much greater than it once was. The effects spread far and wide - from the housing market to the grocery stores, and consumers will find themselves caught in the middle. 

Conclusion

What’s done is done, so the question now is whether the banking crisis has truly ended. The market and the U.S. dollar have both stabilized since that tumultuous time, but some economists speculate that it could happen again. The Federal Reserve has since been speculating on ways to mitigate the damage of future bank failures, if they happen, and on ways to avoid the sort of massive payout they had to enact in March. Whatever happens next, one thing is for certain: the U.S. economy has survived worse!

Sources:

 Peterson, Dana M, McLaughlin, Erin, Barnes, Michelle, and Hart, Hollis. “2023 Banking Crisis

US By the Numbers, 6-Month Update.” The Conference Board, 29 Aug. 2023, https://www.conference-board.org/pdfdownload.cfm?masterProductID=48942. Accessed 3 Oct. 2023. 

 Horsley, Scott, and David Gura. “A New Report Assesses Last Month’s Bank Failures and Includes Lessons for the Future.” NPR, 28 Apr. 2023, https://www.npr.org/2023/04/28/1172836560/a-new-report-assesses-last-months-bank-failures-and-includes-lessons-for-the-fut. Accessed 3 Oct. 2023.

 Tuovila, Alicia. “What Is a Capital Reserve?” Investopedia, 21 Dec. 2006, https://www.investopedia.com/terms/c/capitalreserve.asp. Accessed 3 Oct. 2023.