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Bank stress to bring US closer to recession

Bank stress to bring US closer to recession

Minneapolis Fed President Neel Kashkari believes that the stress in the banking sector could bring the US closer to a recession.

The Fed official assumes that the woes in the banking system could adversely affect the real estate market and the construction industry. It may also increase the likelihood of a downturn.

"What’s unclear for us is how much of these banking stresses are leading to a widespread credit crunch. And then that credit crunch, just as you said, would then slow down the economy," he said. "The banking system has a strong capital position and a lot of liquidity and has the full support of the Federal Reserve and other regulators standing behind it. Thus, it is resilient, and sound," Kashkari pointed out.

In early March, shock waves rippled through markets after the collapse of Silicon Valley Bank (SVB).  SVB was the biggest bank to fail since the 2008 financial crisis.  As a result, the FDIC immediately transferred to Deposit Insurance National Bank of Santa Clara all insured deposits of Silicon Valley Bank. Moreover, New York state regulators shut down Signature Bank, a big lender in the crypto industry, to prevent the spreading banking crisis. Silvergate, another prominent lender in the US cryptocurrency sector, also announced its voluntary liquidation.

After the bankruptcy of SVB, economists published a study in the Social Science Research Network. They estimated that there are 186 US banks that may be prone to similar risks. If depositors panic and rush to withdraw their funds, they will leave the banks without sufficient assets. The US government is ready to help such banks but it will hardly be able to provide enough liquidity to all of them. According to preliminary estimates, the US authorities will need about $2 trillion to stabilize the ailing banking sector.


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