Concerns over recurrence of Domino bankruptcy in savings and loan association in the 1980s
As the Silicon Valley Bank (SVB) crisis enters the evolutionary phase, the worst is passing, but it is pointed out that small and medium-sized banks in the United States should prepare for serial bankruptcies in ‘slow motion’. Generally, financial crises strike in an instant, but slow-motion crises mean that the system can slowly collapse and appear as an economic recession. There is also a pessimistic view that banks can hasten an economic recession by reducing the supply of money to the market in preparation for a potential bank run.
On the 29th (local time), the Wall Street Journal (WSJ) pointed out that we should be wary of a slow-motion crisis and diagnosed that “a significant number of banks may reduce their operations or be acquired by other companies over the next few years, reducing the supply of credit.”
There are also concerns that the ‘S&L crisis’, in which 3,000 savings and loan associations (S&L) were closed or bailed out in the United States between 1980 and 1994 amid a rapid interest rate hike 40 years ago, could be reproduced. At the time, S&L was covered by short-term deposits for low-interest fixed-term mortgage loans, but suffered a liquidity crisis due to a sharp rise in interest rates and collapsed.
In addition, due to the continuous interest rate hike, US depositors are becoming more sensitive to interest rates and are moving their deposits frequently, and anxiety about deposit stability has led them to flock to large banks, which are known to be ‘failed to fail’, suggesting that the crisis in small and medium-sized banks may intensify. According to the US Federal Reserve, in the second week of March, 120 billion dollars (156 trillion won) of deposits were withdrawn from small and medium-sized banks, while 66 billion dollars (86 trillion won) were inflowed into large banks.
Meanwhile, Bloomberg News reported on the same day that the Federal Deposit Insurance Corporation (FDIC) is considering imposing a special fee on large banks as they will cost about 23 billion dollars (30 trillion won) due to bank failures.
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Source: Donga
Mark Jones is a world traveler and journalist for News Rebeat. With a curious mind and a love of adventure, Mark brings a unique perspective to the latest global events and provides in-depth and thought-provoking coverage of the world at large.