U.S. authorities closed Silicon Valley Bank (SVB) last Friday. Fifteen years after the collapse of Lehman Brothers and the global crisis of 2008, the United States fears a panic effect. Bank stocks are being heckled on European stock exchanges. So will there be a domino effect?
What will be the fallout? Following a bank run, a phenomenon in which a large number of bank customers withdraw their deposits as quickly as possible, the Silicon Valley Bank (SVB) was closed by the authorities last Friday. Founded in 1983, SVB is far from being a small bank. Until a few days ago, it was the 16th largest bank in the United States, with 35,000 customers, $210 billion in assets and 8,500 employees. A bank prized by the tech sector, SVB was, according to Reuters, the banking partner of nearly half of all publicly traded venture-backed U.S. startups in 2022.
Will this crisis spread to the US and beyond? The first step in answering this question is to understand how the collapse of SVB came about.
After large deposits from its customers in 2021, the SVB invests the excess cash in low-interest, low-risk long-term investments, including U.S. Treasuries and bonds. But in 2022, the Fed abruptly raises rates to fight inflation, and start-ups are left with no access to their deposits. The Californian bank was forced to liquidate its bonds in a hurry to cope with the withdrawals, but the bonds were weakened by the rate hike. The bank then suffered a loss of 1.8 billion dollars. This shock wave worried the SVB’s customers, who lost confidence and withdrew their money massively. On Thursday alone, while approximately 42 billion dollars in withdrawal orders were placed, not all of them could be honored. The banking panic has brought down the Silicon Valley Bank.
Instant reaction
But the U.S. is counting on keeping the situation from getting worse. On Friday, March 10, the California Department of Financial Protection and Innovation (DFPI) took control of SVB, citing its lack of liquidity and insolvency. An independent government agency, the Federal Deposit Insurance Corporation (FDIC), was appointed as receiver. Its role is to guarantee bank deposits in the United States.
The FDIC created the Deposit Insurance National Bank of Santa Clara, to protect the insured depositors of Silicon Valley Bank. Normally, deposits made in U.S. banks are insured up to $250,000. But according to the FDIC, 89 percent of the $175 billion deposited was not covered by insurance at the end of 2022, as customers have far exceeded that limit. Treasury Secretary Janet Yellen announced that this limit would be disregarded and that depositors will have access to all of their money on Monday. The Fed also pledged to lend the funds to other banks that need them to meet customer withdrawal requests. These measures are intended to reassure and not to break the confidence of customers, following the example of Joe Biden‘s statements. The collapse of the Lehman Brothers bank and the financial crisis of 2008 are still present in everyone’s mind.
“We’re not in the same situation, it’s much more limited, with a certain type of bank and a certain type of client [regional banks working a lot with the technology sector, editor’s note]”, says Eric Dor, director of economic studies at the IESEG business school. Lionel Melka, a partner at the investment firm Swann, also believes that the banking crisis is already “contained” with the measures taken by the American authorities.
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