The bankruptcy or closure of Silicon Valley Bank (SVB) on March 10 has been one of the news stories with the greatest financial impact in the United States and in a good part of the world, recalling the crises of 1929 and 2008, which divided the history of the banking and securities in the United States in a before and after, except that the "before" apparently did not serve as a lesson to avoid the debacle.
Experts agree that what happened to Silicon Valley Bank is that after years of abundant liquidity and very low interest rates, in 2022 inflation began to rise.
The central banks' response has been to raise interest rates and tighten monetary policy.
This decision led to investors having less money for their companies. On the other hand, when interest rates rose, the value of public debt that had been previously issued fell, since it paid much lower interest.
This caused two consequences for Silicon Valley Bank: customers began to reduce their deposits (16 billion in 2022) and the value of investments in public debt began to generate losses.
In 2023, interest rates have continued to rise, customers have continued to withdraw deposits, and the bank has had to liquidate bonds with heavy losses ($800 billion). Upon reporting losses, many customers panicked and deposit withdrawals increased.
The bank attempted a capital increase (2 billion dollars), but the markets turned their backs on it.
On March 9, the bank's shares lost 60% and on March 10, another 60%. Immediately, the banking authorities intervened the bank.
On the same day, bank shares around the world fell an average of 10% and the main stock exchanges of European markets also began to feel imbalances in the flow of investors.
Although the Government of the United States, through President Joe Biden, together with the Treasury Department, assured that depositors had their money guaranteed, it is likely that there are problems in some other bank that has risked too much in public debt, in cryptocurrencies or other risky assets.
In short, the failure of Silicon Valley Bank was due to inflation that has raised interest rates and tightened monetary policy.
Since the bank had previously invested in public debt, and had to liquidate it when clients started withdrawing deposits, it recorded significant losses and liquidity problems.
boomerang effect
On March 8, Silicon Valley Bank issued a press release stating that it was trying to raise liquidity.
But the announcement had the opposite effect when the bank's shares plummeted and a run on the institution ensued, precipitating the closure.
That, in turn, created a ripple effect that led President Joe Biden to ensure that the banking system is safe, created jitters on Wall Street, and spurred investigations by the US Department of Justice and the Securities and Exchange Commission (SEC). ).
The digital page specialized in financial issues Axios described the situation as follows: "An act aimed at propping up its balance sheet did exactly the opposite, because the bank did not explain its actions to customers, who were already suspicious about the closure of Silvergate Bank just a few days before."
Forbes Argentina, another portal specialized in economics, stated that “Remaining silent in the face of a crisis is not a recommended option. The longer business leaders refrain from sharing information about a crisis, the more likely they are to be accused of trying to cover up the situation or avoiding talking about an embarrassing situation.”
Donald Trump's Responsibility
It should be noted that some economists blame a law approved during Trump in 2018, called the Economic Growth, Regulatory Relief and Consumer Protection Act, which had strong support from Republicans and Democrats, as the culprit of this collapse. This law was incorporated into United States federal law by President Donald Trump on May 24, 2018.
The bill softens regulations imposed by Dodd-Frank after the 2007-2008 financial crisis by raising the threshold to $250 billion from the previous $50 billion, under which banks are considered too important to the financial system. enough to allow them to go bankrupt.
Said law, says The Intercept, had a campaign in favor of Greg Becker himself, president of SVB, who with this instrument asked Congress to lift some of the banking regulations that were adopted after the 2008 crisis, "given the profile low risk of our activities,” Becker said that year.
Chain reaction
This collapse also brought with it other consequences: On March 13, Signature Bank (SB) also declared bankruptcy by registering the so-called “domino effect”, just like First Republic Bank.
The SB's main business, real estate, was not the reason for its collapse. The reasons were its devalued investments in cryptocurrencies in recent years and the drag suffered by the bankruptcy two days before of Silicon Valley Bank, an entity specialized in financing the technology industry.
His disappearance marks the third largest bank failure in US history and the shutting off of a major liquidity spigot for New York City real estate.
On the other side of the ocean, imbalances have also been registered in different institutions during the current week, especially in the stock markets and the powerful Credit Suisse.
Credit Suisse shares lost around 10% of their value on the Zurich Stock Exchange this Friday, and doubts about the bank's stability return to the Swiss stock market, after the great ups and downs of the previous two days.
The share of Switzerland's second largest bank is once again below the psychological barrier of two Swiss francs and is now around 1,8, after reaching a record low of 1,5 francs on Wednesday.
The bank, which lost 24% of its stock market value on Wednesday, but recovered 19% on Thursday, after announcing that it would receive financial aid from the Swiss National Bank (central), opened the day on Friday in positive, but returned to losses within a few minutes.
Meanwhile, on the New York Wall Street stock exchange, futures also operated in the red, with a 0,50% drop in the Dow Jones; 0,52% of the S&P and 0,11% of the Nasdaq.
Wednesday, March 15, was the most critical day for the European stock markets: the London stock market closed at -3,83%, the Madrid stock market had the worst decline with 4,37%, while the Milan stock market had a drop of 4,61% and that of Frankfurt (-3,27%).
The voice of Joseph Stiglitz
The Nobel laureate in Economics, Joseph Stiglitz, blamed the rapid rise in rates by the US Federal Reserve for the failure of Silicon Valley Bank, which, in his opinion, is a sign that its policy "has failed".
Stiglitz considered the banking crisis that has opened with the collapse of SVB “inevitable”.
"What has happened is the result of what the president of the Federal Reserve has done," he expressed in reference to the successive increases in interest rates to curb inflation for a year.
He explained that the Californian bank had grown a lot thanks to the pull of the digital business and his mistake was to place the abundant deposits that he obtained from his clients in United States debt securities, thinking that the economy would remain stable and that this was a safe and secure product. profitable.
“It is a classic investment portfolio management failure that actually has nothing to do directly with digital business,” added the former World Bank president between 1997 and 2000.
He also accused the US banking supervision system for not having warned of the problems that could be faced, which in this case was not a problem of loans, but of a lack of correspondence between the assets and liabilities of the entity.
Uninsured deposits
Venezuelan economist Francisco Rodríguez, former director of the National Assembly's (AN) Economic and Financial Advisory Office between 2000 and 2004, stated that the collapse of the SVB was due to its having a number of uninsured deposits from large technology companies.
"In the United States there is a system that insures all depositors of up to 250 thousand dollars, but these deposits were not insured because the bank decided to invest them in illiquid long-term bonds and very sensitive to changes in interest rates," he explained. about.
Reflections and recommendations
Edmundo Lizarzaburu, a professor at the Peruvian University ESAN, affirms that the crisis of SVB and Signature Bank teaches financial institutions to identify their diversification potential to allocate their resources and also to attract them. “The real sector, public and private companies, must evaluate their sources of financing and diversification. It is essential to always have alternatives that make it possible to change potential contractions in sources of financing or lines of credit”.
Kevin Rose, a journalist specializing in banking and finance for the New York Times, recommended that banks establish themselves as a financial entity with clients who have a capacity to finance themselves that fluctuates when interest rates are rising, not invest their deposits in long-term bonds. They will lose their value if interest rates rise.
Ignacio Zorzoli, Finance Director of the Center for Economic Studies Argentina XXI, stated that the US Federal Reserve should clean up the banks' balance sheets by repurchasing treasury bonds at nominal value and at the same time safeguarding savers' deposits.
In conclusion, the lack of adequate control of the Federal Reserve, the lack of real information to customers, inflation and the rise in interest rates were the breeding ground to promote a schism whose consequences have not yet ended.
The future of the Californian entity will depend on the interest of a large Wall Street bank in acquiring it in a bankruptcy. Several customers tried to withdraw their deposits on March 10. The bankruptcy of Silicon Valley Bank generated a chain reaction in the United States that caused the fall of the New York Stock Exchange, distrust in savers and the closure of two other banks: Signature Bank and First Republic Bank.
CAF: it will not affect Latin America
The president of the Development Bank of Latin America (CAF), Sergio Díaz-Granados, affirmed last Wednesday that the financial system of the region "is in a better position" in the face of external shocks than in previous decades, for which reason he does not foresee an effect contagion in the region due to the bankruptcy in the United States of the Silicon Valley Bank (SVB).
In the opinion of Díaz-Granados, the fall of the SVB was "clearly" the product of the institution's imprudential management, due to the way "how they were anchored in the purchase of bonds and structuring a financial planning on the basis that the rates were 0% They would remain in time.
"On the Latin American side, I don't think a contagion channel is coming from there, it doesn't seem like it," added the president of CAF, who stressed that "the financial crises in Latin America and the Caribbean in recent years have been preparing better to the financial system”, which is now “much more solvent and is better off facing the shocks of external crises”.
Past and future of a financial emporium
Silicon Valley Bank (SVB) was founded in 1983 and is headquartered in California. The institution specialized in the financing of "startups", that is, individuals or groups dedicated to entrepreneurship.
It has subsidiaries in 16 countries on various continents, including the UK, Israel, India and China. It also has a subsidiary in the Cayman Islands, a tax haven.
At the end of 2022, it had 173 billion dollars of customer deposits that it had invested in loans (74 billion dollars) and financial investments, mainly public debt (107 billion dollars).
In 2022, it was the 19th-ranked bank in the United States in deposit volume, had 8 employees, and posted profits of $553 billion. Once the collapse is complete, the most likely in this case is that, in the near future, a large Wall Street bank will acquire Silicon Valley Bank in a bankruptcy.
The big bank will take over SVB's assets and liabilities, compensate its depositors, and no one will suffer catastrophic losses.
