Silicon Valley Bank is the largest bank to fail in the US since the 2008 financial crisis and its fall on Friday raised fears for a moment of a new chain collapse like the one that shook the world economy then.
To avoid a “contagion effect” in the rest of the banking industry, the authorities worked at full steam over the weekend.
This was how on Sunday afternoon it was announced that all depositors could withdraw their money and, at the same time, they informed dthe closing of a second bank: Signature.
In just three days, two banks went into a tailspin and were forced to end their operations.
This Monday, the president of the United States, Joe Biden, assured that the financial system of the nation is safe, reaffirming the attempt to project calm after the rapid and surprising collapse of the banking entities generated fears of a crisis more extensive.
“Your deposits will be there when you need them”he affirmed, adding that the directors of the banks will have to be fired and that the money that will be returned to the clients will not be paid by the taxpayers.
The return of these resources to all depositors will be financed with the Deposit Guarantee Fund (DIF) which was created for emergency situations.
This fund is regularly financed with quarterly payments made by the banks themselves and with the interest generated by government bonds.
Americans must “rest assured that our banking system is safe,” Biden has said. According to the president, SVB clients will be able to access their money starting this Monday.
The US president also addressed investors, telling them that they will not be protected: “They took a risk and when the risk doesn’t pay off, investors lose their money. That’s how capitalism works.”
Experts maintain that the government tried to shield itself to avoid public anger provoked by the 2008 Wall Street bailouts funded by taxpayers.
But how did it get here?
Timeline of the crisis
- The alarms went off last Wednesday, when the authorities of the Silicon Valley Bank (SVB)the 16th largest in the United States, announced that they needed to raise $2.25 billion to cover losses.
- This generated panic among its clients, who by the end of the next day had withdrawn up to US$42 billion from their deposits, leaving the entity in an unsustainable situation.
- US regulators had no choice but to shut down the bank on Friday and seize control of its clients’ deposits.
- Trying to prevent a crisis of confidence in the banking systemon Sunday the US Federal Reserve, which acts as the country’s central bank, announced that it will guarantee all the bank’s deposits, containing, for the moment, the panic.
What is Silicon Valley Bank?
Silicon Valley Bank was founded in 1983 in Santa Clara, California, and has experienced rapid expansion in the past decade.
Its main clients, as its name indicates, have been technology companies settled on the west coast of the United States.
There has been a crucial lender to many start-up companies, known as start up.
In fact, SVB was the banking partner for almost half of the US-backed healthcare and technology companies listed on the stock markets last year.
The bank had 8,500 employees worldwide, although most of its operations were in the US.
The first subsidiary that the bank opened outside the country was in the United Kingdom, which, after the collapse, was bought by the giant HSBC for the symbolic price of 1 pound sterling (US$1.21).
Why has it collapsed?
Two main factors have shaken the bank in the last year: the fall in value of the shares of technology companies and the aggressive rise in interest rates in the United States to deal with inflation.
The bank had bought in the last two years, with customer deposits, a large number of fixed-income bonds, an investment that is usually considered safe.
However, when interest rates rise, bond prices fall, so the SVB investment lost value.
This would not have been of much consequence if they had been able to hold those bonds for several years. However, the current economic situation has meant that many of its clients, illiquiddecided to use their deposits.
These clients did not find another way to finance themselves and continue paying, for example, the salaries of their workers since, due to the high interest rates, they preferred not to get into debt and they did not find large investors who wanted to take risks by allocating funds to start-ups.
In this way, SVB’s clients began to withdraw their deposits, and the bank, since it did not have enough liquidity to meet their demands, was forced to sell those bonds at a loss.
And in this way it came to last Wednesday, March 8, when the bank announced that it was trying to raise US$2.25 billion to cover those losses.
The announcement triggered a fear spiral, with clients starting to withdraw their funds for fear of losing them.
Because, under US law, the deposits were insured up to US$250,000, customers and companies whose funds exceeded that figure – nearly 90% of Silicon Valley Bank’s accounts – feared that a bankruptcy of the bank could make them lose all their money.
Panic began to spread until on Thursday the entity’s shares plummeted more than 60%.
What first steps were taken
In the face of that free fall, which sparked a global sell-off of bank shares, US regulators stepped in and closed the bank on Friday.
The entity was left in the hands of the Federal Deposit Insurance Corporation (FDIC), an independent federal agency that was created after the crash of 1929 and whose mission is to guarantee and recover money from bank customers in the event of bankruptcy.
In this way, the FDIC was able to protect the remaining deposits in the bank, which amounted to about $175 billion.
The agency said that clients who had their deposits insured would have access to their money on Monday and that the money raised from the sale of the bank’s assets would go to uninsured depositors.
Given the fear that other banks could incur the same risk swept away by the panic of their customersthe same US Treasury Secretary, Janet Yellen, expressed her confidence on Friday in the “strength of the banking system” after meeting with the main regulators of the sector, to whom she conveyed her “absolute confidence that they will take the appropriate measures ”.
What has the Federal Reserve done?
On Sunday, fearing a crisis of confidence in the banking system, the Federal Reserve and the government announced new emergency funds to protect all SVB deposits, not just insured ones.
The US authorities wanted to put all their weight to calm the markets. On the same Sunday night, after a hectic weekend, Janet Yellen, Federal Reserve Chairman Jerome Powell, and FDIC Chairman Martin Gruenberg said in a joint statement that all customersincluding those whose funds exceed the maximum level insured by the government, will be reimbursed.
This will not only affect Silicon Valley Bank but also another smaller entity, SignatureBankbased in New York, which was shut down on Sunday by the FDIC.
Signature’s clients were also heavily tied to the technology and cryptocurrency sector.
On the other hand, the Federal Reserve also announced that it will offer assistance through a new financing program, which will make it easier for banks to obtain loans in a crisis.
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