Three large US banks, Silvergate Bank, Signature Bank, and Silicon Valley Bank, recently failed in a startling turn of events, causing considerable alarm and fear in the financial markets. In response to the bankruptcy of these banks, the Federal Reserve has issued a bailout package to prevent further economic turbulence.
The stock market was seen to respond negatively due to panic sells. Stocks of the aforementioned banks were seen to collapse more than 50% in a day. The loss also eliminated all Wall street gains of 2023.
Investors are keen to know the meaning of this collapse and the possible implication for their financial activities. In the following section, we will investigate the effects of US bank failures and the Fed's bailout.
Why did 3 US Banks Fail?
The assets of Silvergate Bank were taken over by the Federal Deposit Insurance Corporation (FDIC) after Silvergate Bank failed on March 12, 2023. The bank, which largely serves the digital currency industry, struggled to manage its loan portfolio, resulting in a severe decrease in its financial situation.
This was followed on March 13 by the fall of another large lender, Signature Bank, attributable to the bank's exposure to high-risk loans.
The immediate impact was seen in the financial market by a crash to all three stocks:
Silicon Valley Bank, which likewise specializes in helping tech entrepreneurs, was the third bank to fail, and on March 14, the FDIC announced its liquidation. The bank apparently encountered liquidity problems and could not satisfy its obligations, resulting in its failure.
The Collapse & Its Effect In The Financial Market
The bankruptcy of these three banks has shaken the financial industry, causing investors and depositors to worry about banking system stability. This increased deposits in other banks, especially "too big to fail" ones.
However, according to Bloomberg, JPMorgan Chase, Bank of America, and Wells Fargo received large deposits after the bank failures.
These institutions' failures have questioned banking regulatory control. Critics say all three banks passed the Fed's latest stress testing. This has led to calls for stricter and more open regulations to prevent such incidents.
The Government and Federal Reserve's Actions to Prevent a Crisis
The Federal Reserve issued a financial system stabilization program after the bank collapsed. The package includes capital injections, distressed asset purchases, and low-interest loans to weak banks. The bailout prevents bank failures and preserves the financial system.
The Fed's bailout has garnered mixed reactions. Some support the action, believing it will prevent a wider financial disaster. Nonetheless, some argue that the bailout rewards risky bank activity and sets a dangerous precedent for future government economic involvement.
In the aftermath of the bank failures, President Joseph Biden sought to reassure the public and investors. In a statement issued on March 13, he underlined the necessity for a robust and stable financial system and committed to preventing future occurrences of a similar nature.
In addition, he demanded increased openness and accountability in the banking business.
The Potential Long-Term Consequences Of The Incident
As investors and depositors reevaluate their trust in the financial system, the aftermath of the American bank collapses will certainly be felt for some time. The failure of these banks has revealed regulatory framework flaws and raised issues about the validity of stress tests as an indicator of bank stability.
It remains to be seen whether the Fed's bailout will be adequate to restore trust in the financial system or whether additional action will be required to avert the failure of additional banks.
Regulatory Oversight in the Banking Industry
The fact that all three failed banks had passed recent stress tests has raised questions about the effectiveness of regulatory oversight in the banking industry. Immediate action from the government and the Fed would be the only way to gain investors' trust.
Moreover, the higher interest rate and upcoming rate hikes could relieve some pressure on the banking sector’s earnings.
Implications for the Digital Currency Industry
Silvergate Bank, one of the failed banks, primarily served businesses in the digital currency industry. It raised a question regarding the crypto-friendly environment.
Distribution ledger technology and cryptocurrency are the future, where people have better control of their assets than the traditional banking system. Events like bank closures are expected to be a positive factor for cryptocurrencies.
The evidence is clear from the Bitcoin price, which moved over 30% after the crash.
Should You Buy Silvergate Bank, Signature Bank, or Silicon Valley Bank Stocks Now?
A stock market crash does not mean everything is ending. Rather a lower stock price could be an attractive investment opportunity.
Banks are directly connected to the global economic system, where support from the government and the central bank could recover the loss soon.
Silvergate Bank stock showed no sign of recovery, but Signature Bank stock (NASDAQ: SI) showed a possibility of a recovery from the 2020 low.
The weekly price still trades below the 68.94 multi-year low, where the 50% Retracement level of last week’s crash is at 87.71 level.
Investors should wait for a strong recovery above the 87.71 area and look for buy signals if there is a solid fundamental background.
The failure of three large American banks, Silvergate Bank, Signature Bank, and Silicon Valley Bank, has reverberated throughout the financial sector.
In response to the bank collapses, the Federal Reserve has announced a rescue plan intended to stabilize the financial system. Investors and depositors will undoubtedly reevaluate their confidence in the banking system for some time after the bank failures.