This illustration picture shows the Silicon Valley Bank (SVB) logo displayed on a smartphone in Arlington, Virginia, on March 10, 2023InternationalIndiaAfricaOleg BurunovThe shutdown of SVB has already prompted many to draw parallels with the financial crisis that rode roughshod over the world economy in 2008. The Biden administration is hastily trying to hammer out “material action” in an effort to limit the ripple effect and repercussions across the US banking system after the collapse of Silicon Valley Bank (SVB). How will the situation develop, and will there be overseas risks? Sputnik is exploring.
Is There Risk of Contagion for Regional Banks?
Larry McDonald, founder of the investment newsletter Bear Traps Report, told a US media outlet that tech and start-up focused banks, as well as regional banks, could face serious “contagion” risk following the collapse of SVB.The outlet cited an unnamed source as saying that the situation with SVB was like someone shouting “fire in a crowded theater where there is no fire,” leading many businesses and tech investors to ask for their money back from banks just to be safe.Sputnik ExplainsSecond Largest Bank Collapse in US History: What Happened to SVB, and What Comes Next?Yesterday, 13:14 GMTSome, however, argue that SVB’s failure is not a signal of systemic risk for the US financial system as a whole due in part to strict regulations adopted after the global financial crisis.“We do not believe there is contagion risk for the rest of the banking sector on the heels of SVB’s struggles. The deposit base from the major banks is much more diversified than SVB and the big banks are in good financial health,” David Trainer, CEO of the investment research firm New Constructs, told a US media outlet.
What About the Overseas Effect From SVB’s Collapse?
The fallout from the collapse of SVB seems to have started spreading around the world. With concerns of contagion already reaching Canada, India and China, SVB’s unit in the UK was bought by the banking group HSBC to ease the fallout.The acquisition “strengthens our commercial banking franchise and enhances our ability to serve innovative and fast-growing firms, including in the technology and life-science sectors, in the UK and internationally,” HSBC CEO Noel Quinn said.Chancellor Jeremy Hunt in turn stressed that the deal “ensures customer deposits are protected and can bank as normal, with no taxpayer support.” This came after leaders of about 180 tech companies called on Hunt to intervene.“The loss of deposits has the potential to cripple the sector and set the ecosystem back 20 years. Many businesses will be sent into involuntary liquidation overnight,” they said in a letter to the UK Chancellor. According to them, “This crisis will start on Monday and so we call on you to prevent it now.”Apart from China, Canada, India, and the UK, SVB had branches in Denmark, Germany, Israel and Sweden. SPD Silicon Valley Bank Co. – SVB’s joint venture in China – was seeking to calm local clients overnight by reminding them that operations have been independent and stable.
Repeat of the 2008 Financial Crisis?
Billionaire hedge fund manager Bill Ackman has, meanwhile, compared the fall of SVB to the same developments with Bear Stearns, the first bank to collapse at the start of the 2007-2008 global financial crisis.“The risk of failure and deposit losses here is that the next, least well-capitalized bank faces a run and fails, and the dominoes continue to fall,” he tweeted.Indian-American Vivek Ramaswamy, who earlier announced his candidacy in the 2024 Republican Party presidential primaries, has underscored the need to learn lessons.”A key cause of the 2008 financial crisis was the use of social factors to make loans (back then, fostering home ownership). When we don’t learn lessons, history repeats itself: did Silicon Valley Bank use ESG [Environmental. Social. Governance] factors to price its loans? Roll that log over & see what crawls out,” he noted in a tweet.
Ramaswamy was echoed by economist Stephanie Pomboy, who told a US media outlet that "we are on the brink of a 2008-style financial crisis and I'm not trying to be hyperbolic… We've got some major consequences coming at us, and I think it's going to devolve very rapidly because of all the leverage."
Are Implications Taking Place?
It seems that the fallout from SVB’s failure is already in place, given the closure of New York-based Signature Bank by regulators on Sunday. The goal is to try to prevent the spreading of a banking crisis in the US, according to an American media outlet.“We are also announcing a similar systemic risk exception for Signature Bank, which was closed today by its state chartering authority,” the US Treasury, Federal Reserve, and Federal Deposit Insurance Corporation (FDIC) said in a joint statement on Sunday evening.The banking regulators, for their part, said that “all depositors” at Signature Bank would have full access to their deposits, claiming that “no losses will be borne by the taxpayer.”
What Will the Federal Reserve Do?
President Joe Biden is expected to deliver remarks later in the day on how the US government “will maintain a resilient banking system to protect” the country’s “historic economic recovery.” Touching upon SVB’s failure, POTUS urged the necessity of continuing the government’s efforts “to strengthen oversight and regulation of larger banks so that we are not in this position again.”The president specified that at his behest, US Treasury Secretary Janet Yellen worked with banking regulators over the weekend to address problems with SVB and New York-based Signature Bank. On Sunday, Yellen said in a joint statement with Federal Reserve Board Chair Jerome Powell and FDIC Chairman Martin Gruenberg that the US Federal Reserve System was going to allocate additional funds to American banks to help them meet the needs of all their depositors.Additionally, the Federal Reserve is reportedly considering easing the terms of banks’ access to its discount window. The move aims to help firms turn assets that have lost value into cash without the kind of losses that led to the collapse of SVB.The Treasury and the FDIC have meanwhile said during a briefing with California lawmakers that their top priority now was to organize a sale after the collapse of SVB.The Treasury is also working to find a solution in order to provide assistance for uninsured accounts over the $250,000 threshold. Yellen, for her part, stressed that the main aim of the US government was to prevent a chain reaction after the collapse of the bank, but there would not be a bailout.One US media outlet warned that the Biden administration would face a banking crisis in case there would not be a plan of action to help the clients of SVB worked out by Monday.