There's no denying that JP Morgan's recent takeover of First Republic Bank has raised concerns about the soundness of the US banking sector. And rightly so, as the stocks of mid-sized banks plummeted on Tuesday, raising fears that more banks will fail.
But what is causing these worries? For starters, the failing banks have exposed weaknesses in the US economy. Commercial real estate valuations have plummeted, and banks that financed the acquisition of these buildings are now experiencing stress as buyers are unable to keep up with their mortgage payments.
Furthermore, US banks are sitting on a mountain of unrealized losses, estimated to be around $620 billion, but potentially much higher. These are the flaws in the US banking system, and if authorities do not act quickly, it might lead to a train wreck that the world cannot afford.
It's critical to understand how banking operates like a domino effect. If one piece falls, the others will undoubtedly follow, resulting in a domino effect. Over 2,000 American banks are facing losses, their liabilities exceed their assets, and the value of their loan portfolios has plummeted dramatically.
This scenario has justifiably concerned investors. But it's important to remember that the stock market is primarily driven by sentiment, so this strong reaction to a bank failure could be an overreaction. However, we cannot ignore the exposed vulnerabilities in the US economy, which are putting pressure on other banks.
To summarise, the US banking crisis is far from over, and we cannot afford to disregard the system's flaws. It is time for regulators to step in and avert a train catastrophe that might have catastrophic ramifications for the global economy. As always, we will keep you up to date on the latest financial news. Keep an eye out!
Source:
Firstpost, 3 May 2023, "After First Republic Collapse, US Bank Stocks Tank | Vantage with Palki Sharma", 