Banking Collapse

The banking system is the backbone of the United States economy, and any collapse would have severe consequences. In March 2023, three small to mid-size US banks failed, leading to a sharp decline in global bank stock prices and a rapid response by regulators to prevent potential global contagion.

Silvergate Bank and Signature Bank, both with significant exposure to cryptocurrency, failed amid turbulence in the crypto market, then while Silicon Valley Bank (SVB) failed when a bank run was triggered after it sold its Treasury bond portfolio at a large loss, causing depositor concerns about the bank’s liquidity. Depositors quickly began withdrawing cash from San Francisco-based First Republic Bank (FRB), which focused on private banking to wealthy clientele, leading to its closure and sale to JPMorgan Chase.

The US Federal Reserve established a Bank Term Funding Program (BTFP) to offer loans of up to one year to eligible depository institutions pledging qualifying assets as collateral. Soon after

Global industry regulators also helped by intervening to provide extraordinary liquidity, including the Bank of Canada, Bank of England, Bank of Japan, European Central Bank, and Swiss National Bank.

Many are still freaking out about a possible bank crisis, with good reason. The SEC is looking to block the shorting of bank stocks as most of these regional banks are insolvent if they had to show their losses with the current interest rates on bonds. This would be a major problem for the US economy if the confidence of our banking system was undermined.

Now what if this crisis were to continue? Banks are responsible for providing loans to individuals and businesses, managing deposits, and facilitating transactions. If the banking system were to collapse completely:

1. There would be a severe shortage of credit, and individuals and businesses would be unable to borrow money. This could lead to a sharp decline in economic activity, as businesses would be unable to fund their operations or invest in new projects.

2. Result in a major loss of confidence in the financial system. This loss of confidence would lead to a run-on a bank, as individuals and businesses try to withdraw their deposits. This could further exacerbate the shortage of credit and make it more difficult for banks to maintain adequate reserves.

3. Major issues for the federal government. The federal government relies on the banking system to finance its operations, and a collapse of the banks would make it difficult for the government to borrow money. Which could lead to a default on government debt and create havoc for the global financial system.

A collapse of the banks would also have a massive social impact. Without access to credit, many individuals and businesses would be unable to pay their bills, resulting in a significant increase in poverty and homelessness. This could lead to social unrest and political instability.

In order to prevent a collapse of the banking system, it will be essential that the government takes decisive steps to regulate the financial sector and ensure that banks maintain adequate reserves. It is also important that the government provides support to the financial sector during times of crisis to prevent a run-on a bank and maintain confidence in the financial system.

A collapse of banks in the United States would be terrible for the economy, the government, and society as a whole. It is essential that steps are taken to prevent such a collapse from occurring and to ensure the stability of the financial system.

Will this banking crisis continue? Only time will tell. But this only strengthens the use case for cryptocurrencies to decouple from centralized organizations that fail from mismanagement and risk taking.