Jessie Cohen
What led to the collapse of Silicon Valley Bank and others?
Like any other bank, it operated by taking a portion of deposits and creating loans — but this only works if there's enough deposited at once.
LEARN MOREPosted: 11:18 a.m. EDT Apr 7, 2023
Headlines about the collapse of Silicon Valley Bank and Signature Bank took over the news cycle in early March, and some experts are warning that may just be the start of a rough patch for the industry. JPMorgan Chase Chief Executive Jamie Dimon told shareholders that while the economy is in "pretty good" shape, the collapse of the two banks is a warning sign that we may be feeling the instability for years to come. Kishore Kulkarni, an economics professor at Metropolitan State University Denver, predicts that more banks will close as several other banks are currently struggling.
"If this happens with a whole lot more banks, than we have a big job to do," Kulkarni said.
He says interest rate hikes over the last year increased bank liability, and the Federal Reserve is expected to raise them again.
"That they will keep on increasing the interest rate until the inflation rate is 2%, now, that is asking way too much, in my opinion," Kulkarni said.
A recent study by a group of leading economists concluded that 186 other banks are at risk of failure. Kulkarni says higher interest rates can lead to economic vulnerability for savings institutions.
"In the depression — in the four years of 1929 to 1933 — 4,400 banks had to close down. And that's what we call a really big problem," Kulkarni said.
So does your wallet feel the effects of the banks closing? Has your job been directly impacted? Many people would say no. But Kulkanari says it's the ripple effects of a recession that put everybody at risk.
"When you have a higher interest rate, you can't really borrow as much. And if you can't borrow as much, then the construction slows down, most of the big investment projects slow down. And if the investment slows down, then we don't produce as much. And if we don't produce as much, we don't employ as many people," Kulkarni said.
The closures in March have been dubbed "The Banking Crisis of 2023," but Kulkarni says things are not at a catastrophic level.
"This is definitely not as crisis situation as 2008 or 2009 when we had what we call a systemic risk, the whole system was in danger," Kulkarni said. "Up until that point we won't call it a crisis, we'll just call it a small disturbance in the banking system."
Experts say it's crucial to pay attention to what's to come. The Fed will likely continue to raise interest rates to combat inflation. And the most recent Bankrate survey of economists shows a 64% chance of a recession by the end of 2023.
"The next few months, especially this whole year of 2023, the recession threat is real and if the Federal Reserve insists on increasing the interest rates further, the recession is almost guaranteed," Kulkarni said.
