The Collapse of Silicon Valley Bank: Implications for Banks, Investors, and Regulators
The recent collapse of Silicon Valley Bank (SVB) has sent shockwaves through the banking sector and rattled investors worldwide. The bank, which had been strategically buying long-term Treasury bonds to make an arbitrage gain of less than 2 percentage points, suddenly found itself in hot water when troubles in the tech sector pushed depositors to start making large withdrawals. This sudden shift between March 11-12 left SVB “sitting on an unrealized loss of close to $163bn – more than its equity base. Deposit outflows then started to crystallize this into a realized loss”, leading to the bank’s eventual collapse.
SVB did not go Banks across the country were losing deposits, raising alarms with investors and some of the bank’s customers. The losses set off fears of a systemic crisis, and the Biden administration responded with a crisis-lending facility for banks to lean on.
But the problems are more complex than that. In comparison to the largest banks in the country, midsize banks like SVB are not held to the same stringent regulations, such as stringent reserve requirements in times of economic hardship. This lack of oversight and the subsequent risks are a global phenomenon.
Inflation continues to remain higher than the Federal Reserve's target of 2%, there is continued evidence of strength in the labor market and consumer spending is still robust. The Fed has also indicated that it will continue to pursue an aggressive tightening of monetary policy until inflation rates go down. The conclusion: The central bank may opt to maintain its current rate increases to demonstrate their trust in their policy plans and their persistent promise to reduce inflation.
The importance of reliable institutions and appropriate regulation is highlighted in this episode, both of which are valued by global investors. That is why the Federal Reserve raised interest rates at the end of the week. Thursday morning, the two-year Treasury yield had dropped to 3.93% from its previous rate of 5.06% just eight days prior. The implication is that the Federal Reserve will reduce its benchmark rate from the present 4.6% if there is concrete proof of an economic slump and dropping inflation.
The success of the banking industry depends on the trust of its depositors. Regulators are limited in their ability to respond to a bank failure that has caused a loss of confidence, as mere modification of regulations is insufficient.
0. “Bad bonds risk bringing down banks, warns ‘Dr. Doom’” POLITICO Europe, 16 Mar. 2023, https://www.politico.eu/article/bad-bonds-risk-bringing-down-banks-warns-dr-doom-nouriel-roubini-svb/
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2. “After SVB’s Collapse, Why People Are Worried About Banks” The New York Times, 18 Mar. 2023, https://www.nytimes.com/interactive/2023/03/18/business/why-people-are-worried-about-banks.html
3. “Banks and the butterfly effect—the global ramifications | Franklin Templeton” Beyond Bulls & Bears, 14 Mar. 2023, https://global.beyondbullsandbears.com/2023/03/15/quick-thoughts-banks-and-the-butterfly-effect-the-global-ramifications
4. “INSIGHT: Banking contagion threatens to spread, hit chemicals demand hard” ICIS, 16 Mar. 2023, https://www.icis.com/explore/resources/news/2023/03/16/10866416/insight-banking-contagion-threatens-to-spread-hit-chemicals-demand-hard
5. “How SVB, Credit Suisse woes change the economic outlook” Axios, 16 Mar. 2023, https://www.axios.com/2023/03/16/banking-crisis-economy-outlook
6. “Confidence” Philstar.com, 15 Mar. 2023, https://www.philstar.com/opinion/2023/03/16/2251923/confidence