About half of U.S. banks may be on the brink of collapse

Fears of a banking crisis sparked by the failure of Silicon Valley Bank do not show signs of subsiding any time soon, with four American banks collapsing in the past two months. The worst scenario has been avoided with JPMorgan Chase’s takeover of First Republic Bank, but concerns remain as mid-sized and community banks may collapse like a domino.

Founded in 1985, San Francisco-based First Republic grew to 14th in size among U.S. commercial banks, but it experienced a bank run after the collapse of SVB and went to the brink of collapse. The fallout of a near-collapse of First Republic dragged down the stock price of Los Angeles-based PacWest Bancorp by 28 percent, along with share prices of mid-cap banks across the U.S. The S&P 500 Regional Banks index plunged to lowest in three years.

Although JPMorgan Chase CEO Jaime Dimon said “this part of the crisis over” after JPMorgan Chase’s purchase of First Republic, many experts pour out warnings that the banking crisis is just getting started. Amit Seru, professor of finance at Stanford Graduate School, estimated that almost half of America’s 4,800 banks are “burning through their capital buffers” and “potentially on the brink of collapse. “In the worst-case scenario, if all uninsured depositors withdrew all their money from U.S. banks, more than 1,600 banks would be left without enough funds to cover their insured deposits,” Professor Seru’s paper calculated.

Concerns remain about a commercial real estate crash resulting from a rate hike, which would further escalate the collapse of regional banks, given that about 5.6 trillion dollars in commercial real estate loans are held by mid-cap banks. The U.S. national office space vacancy rate was 19 percent in the first quarter, an all-time high in 31 years, and even institutional investors failed to pay off their office mortgages, fueling signs of trouble following recent bank failures.

South Korea, where the insolvency risk of real estate project financing of 115 trillion won by non-bank financial institutions and astronomical household debts are weighing on its economy, is no stranger to such bank failures. Securities firms struggle with a high default rate of their loans to real estate PF, which stands at 8 percent, and the number of financially marginalized households and businesses defaulting on their debts for banks, credit cards, non-bank financial institutions, and money lending businesses is on the rise. Even a small misstep may lead to wide-ranging repercussions for the economy. The government and finance sector must build a higher, stronger breakwater in preparation for the ripple effect of the recent banking crisis started in the U.S. Preemptive measures have to be introduced to address the risks posed by the non-monetary institutions, a weak link. The liquidity and soundness standards also have to be significantly tightened.