In early March this year, the crash of two large U.S. banks and the near fall of another two banks sent everyone into a panic in anticipation of a global financial crisis. The U.S. government, in conjunction with a group of the largest American lenders, stepped in to prevent further collapse and help restore a relative calm.
But what does this mean for financial institutions and customers both in the U.S. and globally?
Find out more here.
What is a Banking Crisis?
A banking crisis refers to a situation where a large number of banks or financial institutions experience significant financial distress or failure, leading to a disruption of the financial system. In a banking crisis, customers may lose confidence in the banking system and withdraw their deposits, leading to bank runs. To try to remedy loss in liquidity, a bank may have to sell their assets at a discount, which can lead to additional loss that further exacerbates the crisis. Governments and central banks often respond to a banking crisis by providing emergency funding and guaranteeing deposits, which is what we saw happen recently.
A banking crisis can be caused by a variety of factors, including excessive risk-taking by banks, economic shocks and financial market instability. Banks may also face liquidity problems or solvency issues, making it difficult for them to meet their financial obligations. This can cause a chain reaction that leads to the failure of other financial institutions.
What are the Impacts of a Banking Crisis?
A banking crisis can have significant economic and social consequences, including increased unemployment, reduced economic activity and a decline in the value of assets such as real estate. There are often global implications as well, as banking crises rarely impact only the country in which it originated because financial institutions are all connected and dependent on one another.
Specifically in the U.S., the recent increasing stress on the banking sector has led to heightened risk of a U.S. recession within the next 12 months, according to Goldman Sachs. This could mean a slowdown in economic activity, businesses cutting back on investments and a decline in consumer spending. Additionally, banks under stress are usually more reluctant to lend. They will pay much greater attention to the creditworthiness of borrowers, whether they’re businesses looking for loans or home buyers trying to find mortgages.
How Are Factoring Companies and Customers Impacted?
As a reminder, factoring is a financial service where a company buys the accounts receivables of other companies minus a factoring fee, and then collects the full amount owed from the debtor. Factoring companies can be impacted by a banking crisis, particularly if they rely on bank financing to purchase these accounts receivables. Additionally, during a banking crisis, the creditworthiness of the companies whose accounts receivables are being factored may be impacted. This can increase the risk of defaults, which can result in additional losses.
It is important to note that not all factoring companies rely on bank financing, and some may have other sources of funding, making them more resilient to a banking crisis. The specific impact of a banking crisis on a factoring company would depend on its business model, funding sources and the overall economic conditions during the crisis.
RTS International is part of the Shamrock Trading Corporation family of brands, which has worked hard to establish and maintain relationships with several partnered financial organizations, securing the diversified funding and fiscal stability necessary to serve our customers and remain dependable even through today’s uncertain environment. RTS International not only remains financially secure and stable, but we’re stronger than ever and have several decades of consistent growth through all types of markets to prove our resilience.