The abrupt collapse of Silvergate Capital Corp. and SVB Financial Group has sent the shock waves across the world. SVB’s sudden demise is the biggest such event in more than a decade, has left legions of Silicon Valley entrepreneurs in the lurch and livid. This development has negatively impacted the economics across the world and almost every market is going downward.
It all started on Monday, when the head of the Federal Deposit Insurance Corp. warned a gathering of bankers in Washington about a $620 billion risk lurking in the US financial system. By Friday, two banks had succumbed to it and put the entire USA economy in jeopardy, at least for now.
It doesn’t matter if US regulators saw the dangers brewing early enough and took enough action before this week’s collapse, this economic mayhem has now teed up for an inter-national debate. US regulators closed the Silicon Valley Bank (SVB) on Friday after it experienced a traditional bank run, where depositors rushed to withdraw their funds all at once
While Silicon Valley entrepreneurs and market experts are in lurch and devising strategy to cope with the SVB and Silvergate’s abrupt demise, in Washington, politicians are drawing up sides, with Biden administration officials expressing “full confidence” in regulators, even as some watchdogs race to review blueprints for handling past crises.
To his credit, FDIC Chair Martin Gruenberg’s speech this week wasn’t the first time he expressed concern that banks’ balance sheets were freighted with low-interest bonds that had lost hundreds of billions of dollars in value amid the Federal Reserve’s rapid rate hikes. That heightens the risk a bank might fail if withdrawals force it to sell those assets and realize losses.
How it happened?
People are asking the question, why these banks suddenly collapsed. Well, the short answer is that these banks did not have enough cash to pay depositors so the regulators closed the bank. The longer answer begins during in the pandemic, when these banks were raking in more deposits than they could lend out to borrowers. In 2021, deposits at SVB doubled.
But they had to do something with all that money. So, what they could not lend out, they invested in ultra-safe U.S. Treasury securities. The problem is the rapid increase in interest rates in 2022 and 2023 caused the value of these securities to plunge. A characteristic of bonds and similar securities is that when yields or interest rates go up, prices go down, and vice versa. This kick started a vicious circle of irregularity and cash crunch.
US President tried to dispel uncertainty
US President Joe Biden has sought to dispel fears over a potential financial crisis following the rapid collapse of two major United States banks, saying customers would be protected and can trust that the country’s banking system is “safe”.
During a brief news conference at the White House on Monday, Biden said he would seek to hold those responsible to account and push for better oversight and regulation of larger banks, while he also promised that “no losses would be borne by the taxpayers”.
On Monday morning, Biden told reporters that “all customers who had deposits in these banks can rest assured – rest assured – they’ll be protected and they’ll have access to their money as of today”. This includes small businesses across the US, he said.
“Americans can have confidence that the banking system is safe. Your deposits will be there when you need them,” Biden said.
Tech Start-Ups are worried, while global markets witnessing bloodbath
Silicon Valley Bank’s stunning collapse has led to the freezing of tens of billions of dollars stored there by startups and their private equity backers, raising fears of a wider tech sector fallout. The company previously boasted that “nearly half” of technology and life science companies that had US funding banked with them, leading many to worry about the possible ripple effects of its collapse.
“The real victims of the SVB fallout are the depositors: startups with 10 to 100 employees, who cannot make payroll, and will have to furlough or shutdown workers as soon as possible. The market across the world are witnessing declining trend, and we can experience a spiral downtrend in the days to come.
U.S. interest rate traders have cut their forecasts for rates following the failure of Silicon Valley Bank (SVB) and its takeover by government regulators on March 10. The run on SVB has made traders increasingly think concerns about financial stability will constrain the U.S. Federal Reserve’s ability and willingness to increase rates further.
Oil prices have also dived as traders expect the implied weakening of economic activity to reduce the trajectory for petroleum consumption over the rest of 2023.
It is still unclear whether it will have an impact on broader industries in the US and around the world. This is because US banking regulations have become a lot stricter after the 2008 financial crisis, especially in the case of bigger banks like JP Morgan Chase, Bank of America, Citi Bank, Wells Fargo and more.
For instance, one of the most important regulations that was introduced was related to capital requirements, meaning a bank must have a certain amount of reserves to weather emergencies. Regulations around diversification also became important for banks after the crisis.
With $209 billion worth of assets as of last year, SVB was the 16th largest bank in America. As it is much smaller compared to the biggest banks in the US, the regulations that apply to SVB are unfortunately not as stringent.