The Silicon Valley Bank and Its Ripple Throughout The World
The Covid-19 pandemic has thrown the global economy in disarray, causing a ripple effect that has touched virtually every sector. One industry that has been particularly affected by the pandemic is finance, with interest rates skyrocketing to unprecedented levels. In this tumultuous environment, even seasoned institutions such as the Silicon Valley Bank (SVB) have struggled to navigate the treacherous waters. The bank bought numerous risk-free assets; however, their fixed interest payments have failed to keep up with the rising interest rates, making their assets depreciate in value.
In 2021, the Federal Reserve Bank of San Francisco supervisors responsible for overseeing The SVB identified several problems, including cybersecurity issues, which required immediate resolution. Despite this evaluation from their overseers, the SVB neglected its financial and operational problems and continued its daily functionalities. This eventually led to the Federal Reserve Bank putting strict restrictions on the growth of the SVB through its assets. As a response to this, the leaders of the SVB had an unrealistic plan. They suggested “higher interest revenue would substantially help their financial situation as rates went up,” as The New York Times stated. Enacting their plan, SVB’s leaders failed to consider that their seemingly harmless attempt to improve their financial situation would not only risk their bank itself but also risk the loss of their clients and depositors, initiating a worldwide panic.
In the forty-eighth hours leading up to March 10, 2023, the SVB faced a multibillion-dollar loss when purchasing US government bonds needed to pay depositors. The loss incurred and the inability to sell the bonds in a timely manner to boost their finances triggered a panic among SVB’s clients, who hastily withdrew all their funds, leading to a typical bank run scenario. Upon the bank’s collapse on March 10, the Federal Deposit Insurance Corporation (FDIC) stepped in and seized total control of its branches and deposits. Apart from the loss of $209 billion in assets, the SVB’s actions had far-reaching consequences both nationally and globally, ultimately resulting in it being the second-largest bank closure since the shutdown of the Washington Mutual Bank in 2008.
Following the SVB’s closure, other regional banks have been grappling with the aftermath and facing heightened pressure. With a reduced customer base and significant uninsured deposits, these banks are under substantial stress. Just two days after SVB’s collapse, the FDIC had to shut down Signature Bank due to a similar situation. Both the SVB and the Signature Bank experienced a bank run, with a considerable proportion of uninsured deposits. Eventually, Flagstar Bank acquired Signature Bank along with its branches and deposits and established a temporary bridge bank to enable depositors to access their funds. Similar to SVB and Signature bank, the First Republic Bank was at the point of collapsing as customers frantically withdrew all their money in fear of recent bank failures. Fortunately, an agreement was reached with groups of American lenders to inject billions of dollars into the bank, thereby averting its bankruptcy. According to the eleven banks that came together on March 16th to help out Signature Bank by depositing $30 million, “… support by a group of large banks is most welcome and demonstrates the resilience of the banking system,” as stated in Bankrate.
On March 15th, the banking crisis made its way into the European economy, triggering panic in markets as Switzerland’s second-largest bank, Credit Suisse (CS), experienced a drastic 30% drop in its shares, resulting in a loss of approximately 25% of its share value at that time. In response to the drop in CS’s shares, the bank borrowed over $50 million from the Swiss National Bank to help diminish the fears of a financial crisis in Europe. Since then, CS’s stock prices have been on the rise, although insufficient to stabilize the bank. Consequently, its major competitor, the Union Bank of Switzerland (UBS), acquired CS in a rescue deal on March 19th to assuage the financial markets panic. The Swiss National Bank offered CS $54 billion as an emergency loan and $225 billion to UBS, in addition to the protection offered against possible losses.
To rescue SVB’s UK business, the Hongkong and Shanghai Banking Corporation initially provided $2 billion but later acquired it for a mere £1 ($1.23). The US Federal Reserve guaranteed all deposits at SVB and Signature Bank, being responsible for $140 billion. To combat the new banking crisis, the Feds implemented a new emergency lending program, The Bank Term Funding Program, established in March 2023, where banks borrowed about $153 million to prevent their bank and others from crashing. This program could have solved the temporary cash problems faced by banks, but in doing so, they have also placed fear in people’s eyes and diminished the value of banks’ securities. “If banks are under stress, they might be reluctant to lend, US Treasury Secretary Janet Yellen said Thursday in testimony to the Senate Finance Committee,” as stated in CNN.
The future remains uncertain, but one thing is clear — deposits of less than $250,000 at an FDIC-insured bank are federally protected. In case of the bank’s closure due to any reason, the US government is obliged to compensate depositors. Presently, banks are under heightened stress, leading them to scrutinize borrowers’ creditworthiness more strictly when granting loans, whether for businesses or homebuyers. Given the global banking crisis, a recession appears more probable, potentially within the next 12 months, with a 35% likelihood. This could pose a significant economic downside for the country, compounded by the mounting stress and escalating interest rates.
