On Friday, the 16th largest bank in the US, Silicon Valley Bank, was forced to close. It was the second largest bank collapse in the country’s history.
The collapse of the bank is currently leading to fears in the markets that this could be just the beginning of a new financial crisis. But before we speculate further: what exactly happened? A brief explanation of the Silicon Valley banking disaster and how it happened:
What did the SVB do?
The Silicon Valley Bank, SVB for short, was the 16th largest bank in the US before it collapsed. It was founded in the early 1980s, but it was mainly after the financial crisis that it started its main activity: promoting high-tech companies and start-ups.
The SVB, which provided the necessary financing to emerging companies, became Silicon Valley’s main bank; SVB had a market share of more than a quarter in the tech industry valley in 2016, making it the most important bank there. According to an analysis by media company Bloomberg, about half of all start-ups in the United States were clients of Silicon Valley Bank.
The tech companies, for their part, kept their money with the financial institution. And thanks to high profits in the tech sector in recent years, that is all the more. At the time of the collapse, SVB had total assets of just over $209 billion. That’s a lot, but compared to the largest banks in the US – the largest being JP Morgan Chase ($3.2 trillion) – Silicon Valley Bank was considered one of the smaller in the United States.
What happened?
On Friday, Silicon Valley Bank was forced to close by US regulators. The closure was preceded by a run by their bank customers, who panicked to withdraw their deposits.
The collapse of the SVB is the second-largest bank failure in U.S. history. It caused (and still causes) great turmoil in the markets. Partly as a result of the bankruptcy of the SVB, share prices fell worldwide towards the end of the week, with bank shares in particular losing value. It is now feared that the turbulence could lead to a chain reaction and further uncertainties regarding the entire financial system.
How did the bank run come about?
Why did customers want to withdraw their money? Silicon Valley Bank was hit twice by the Federal Reserve System’s (Fed) continued increase in US interest rates. On the one hand, because the higher interest rates also caused problems for the tech companies: they made their financing more expensive because they had to pay higher interest rates on investments and loans.
As a result, companies have recently withdrawn some of the funds they had parked with the SVB to cover their higher costs. But that alone shouldn’t be a problem. However, the SVB became fatal because it felt the effects of the higher interest rates itself.
The bank had invested most of its client deposits in US government bonds and mortgages. During the pandemic and when the tech industry was at its peak, about $90 billion was invested this way – very safe, actually. But because the Fed has now raised interest rates so much, these bonds have lost much of their value.
If a central bank like the Fed raises interest rates now, higher interest will be paid on government bonds that are newly issued. So these are more sought after in the market and have more value than the older ones – of which Silicon Valley Bank had a lot on its books.
In order to be able to pay their customers their money, the SVB was forced to sell parts of their facilities. But because these now had a much deeper value, it was hard to get rid of them. The loss, initially of an accounting nature only, now began to materialize in real terms.
When the scale of the problems became clear, the SVB tried to finance itself by issuing shares. When this became known, panic set in – after all, it can be taken as a sign that a company is in serious financial trouble.
As a result, SNB shares lost about 60 percent of their value on Thursday. The bank failed to raise short-term funding and regulators on Friday decided to halt premarket trading in the stock and close the bank. It didn’t help that several major financiers and star investors called on the tech companies to better get their capital out of the SVB.
How dangerous is the bankruptcy of the SVB?
There is no doubt that the markets are very nervous. That only became clear again this morning when, for example, the SMI started the day with a minus after a descent in the past week. The nervousness is also reflected in the fact that another small bank in New York had to close over the weekend because customers had lost confidence.
However, there are a lot of emotions at play right now. And it is precisely these that the American authorities now want to reassure. US Treasury Secretary Janet Yellen stressed on Sunday that the state would not bail out the SVB (“We won’t do that again”). However, this is not necessary in the current situation: “The banking system as a whole is stable.” However, Yellen also admitted that they are now worried about depositors. Therefore, they now focus on meeting their needs.
With the guarantee to insure customer deposits with Silicon Valley Bank, the US authorities want to calm the storm. After several crisis meetings were held over the weekend, Yellen announced that the Federal Reserve, the Treasury Department and the Federal Deposit Insurance Fund (FDIC) would all fund funds to guarantee deposits with the SVB. In fact, deposits are only guaranteed up to the usual $250,000 through the FDIC Deposit Insurance Fund.
From Monday, customers will be able to access their deposited money again, but under the supervision of the authorities. But that’s not all: if other banks got into trouble, their customers would also have insurance, said Janet Yellen in a television interview on Sunday. A new instrument was announced especially for this purpose, the Bank Term Funding Program (BTFB). This is located at the Fed – not the Treasury Department – and is intended to provide the necessary funding to insure customers of the SVB, the New York Bank Signature (which also had to close) and any other customers.
The US authorities are trying to emphasize that the public is not paying for it. The Minister of Finance assured that no tax money would be used for this. And President Biden said his administration will “hold to account those responsible for this mess.” In any case, it is clear that the storm in the markets is far from over, especially given the continued high inflation – and thus the strong reaction of the central banks with higher interest rates.
Soource :Watson
I am Amelia James, a passionate journalist with a deep-rooted interest in current affairs. I have more than five years of experience in the media industry, working both as an author and editor for 24 Instant News. My main focus lies in international news, particularly regional conflicts and political issues around the world.
