Tuesday, May 28, 2024

The Economist: What the collapse of Silicon Valley Bank… means for the US financial system? | economy

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Published by British magazine The Economist Report On the collapse of Silicon Valley Bank, he reviewed the causes of the collapse, its impact on the financial system in the United States, and discussed the possibility of government intervention to save the bank.

At the beginning of its report, the magazine introduced the definition of the bank, saying that it is the 16th largest bank in the United States with assets of $200 billion and is a major lender to large emerging companies in the technology sector. Silicon Valley in California.

He said the bank’s share price, abbreviated as “SVP”, fell 60% last Wednesday and 70% last Friday, as all appeals by its management to support customers failed and it finally announced it would cease trading. Seizing its shares and deposits of its customers, i.e. declaring its bankruptcy.

The cause of the crisis

The report pointed out that its deposits more than quadrupled (from $44 billion) in 4 years, the biggest decline in US banking since the 2008 financial crisis – which it attributed to the banking crisis. 189 billion in 2017 by the end of 2021, while it has grown. His loans to startups ranged from $23 billion to $66 billion.

Having a deposit base that is much larger than the loan book represents a problem, as banks profit from the difference between the interest rate they pay on deposits and the rate borrowers pay. The bank has invested $128 billion by the end of 2021. , has invested mostly in high-priced mortgage and treasury bonds (peak rates).

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Then the world changed – according to the report – and interest rates rose as inflation and bond prices fell, exposing SVB Bank uniquely, and customers reduced their deposits from $189 billion at the end of 2021 to $173 billion at the end of 2022. .

The bank was forced to sell its entire portfolio of illiquid securities at less than that, resulting in a loss of about $1.8 billion, leaving a gap it tried to fill by raising capital, but was unsuccessful.

Exception?

Asked if this bank crisis was an exception, almost all banks suffered losses on their bond portfolios, although depositors’ withdrawals were exceptionally vulnerable.

And US Treasury Secretary Janet Yellen said that in light of what happened to “SVB” many banks are now being monitored, and fortunately those banks are not at risk at this time.

On the possibility of saving SVB, Ro Khanna, a congressman from California’s 17th district, which includes part of Silicon Valley, says the bank is “the lifeblood of the tech ecosystem” and they can’t let it fail.

Government intervention is unpopular, the economist said, but the only option.

Former Treasury Secretary Larry Summers says there’s no need to worry that SVP’s collapse will harm other parts of the financial system if the government gets involved.

The Economist concluded its report by saying that many believed that would be the case, and he was right.

Nadia Barnett
Nadia Barnett
"Award-winning beer geek. Extreme coffeeaholic. Introvert. Avid travel specialist. Hipster-friendly communicator."

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