Monday 16 / December / 2024
New York: After frantic hours of trying to find a buyer for the defunct Silicon Valley Bank, the US government came up with a plan to shore up the banking industry.
Over the weekend, US regulators put in place an emergency funding plan to ensure enough liquidity in the banking system, shut down another lender — Signature Bank — and ensured that the banks' customers had access to their deposits as they sought to limit the fallout from the SVB's implosion.
Will SVB collapse bring a 2008-like financial crisis?
The collapse of the Silicon Valley Bank is the largest bank failure since the global financial crisis of 2008.
But the bank's fall is unlikely to lead to a financial crisis as deep and painful as the one that followed the bankruptcy of Lehman Brothers back then.
Firstly, US banking authorities stepped in early. The "decisive action" by regulators reduced the risk of further bank failures, Moritz Schularick, an economics professor at the University of Bonn, told DW.
Secondly, the United States today has much stricter regulations for banks, especially for the largest banks such as JP Morgan, Bank of America and Goldman Sachs. As a result, the US banks are in much better financial health, in contrast to their overleveraged balance sheets in 2008.
But Schularick cautions that the world should stay "alert" to the overarching problems facing the global financial sector at a time when central banks have been raising interest rates at a hectic pace to bring down inflation.
"These things are inherently difficult to forecast, and the truth is that the problems that brought down Silicon Valley Bank and Signature Bank are not limited to these two banks," Schularick said. "So the question is: Who else is out there?"
On Tuesday, Moody's placed six other US regional banks, including First Republic Bank, Zions Bancorporation and Western Alliance Bancorp, under review for downgrade.
What impact does SVB collapse have on Europe?
"There is a possibility of indirect contagion, but at the moment we do not see this as a specific risk," European Economy Commissioner Paolo Gentiloni said on Monday while speaking about the potential effects of SVB's collapse on the EU.
Germany's Federal Financial Supervisory Authority imposed a moratorium on SVB's German branch, halting sales and payments. In a statement, the regulator stressed that the institution has "no systemic relevance" and therefore "does not pose a threat to financial stability."
Swift action by the UK government, which facilitated the sale of the SVB's London branch to the global financial heavyweight HSBC, secured depositors there, as well.
The EURO STOXX Banks Index, which tracks major European bank shares, initially fell on Tuesday, but recovered to rise 2.7%. The index posted its biggest percentage loss in more than a year on Monday amid fears of contagion.
"A critical difference between the European and US systems, which will limit the impact across the Atlantic, is that European banks' bond holdings are lower and their deposits more stable," Moody's said in a note.
The German startup sector has yet to witness any major fallout from the collapse of SVB, which mainly catered to tech startups.
"At its origin, this is not a startup crisis. It is about the refinancing problems of a bank," said Christian Mile, of the German Startup Association. He, however, conceded that the consequences for German startups could not yet be conclusively determined.
The current crisis came on the back of globally rising interest rates. Central banks use the lever of interest rates to cool business activity and, in turn, inflation. This tightening of monetary policy causes headaches for startups, as it dries up funding and restricts consumer spending.
On the other hand, the collapse and the financial vulnerabilities that it has laid bare could jeopardize the central banks' efforts to rein in price rises.
"SVB's demise will pressure central banks into slowing interest rate hikes," said Arun Sai, of Pictet Asset Management. "Central banks will now have to consider the impact of any further interest rate hikes on the stability of the financial system."
Is Silicon Valley Bank to blame for the crisis?
The Silicon Valley Bank operated with a highly concentrated client base. The mostly venture capital-backed tech startups placed their deposits with the bank. After the bank received large deposits from its customers during and after the COVID-19 pandemic, it invested the excess cash into government bonds, which turned into book losses amid rising interest rates.
When clients weren't sure about funding conditions at SVB anymore, they started withdrawing their deposits, leading to a run on the bank.
"This bank was particularly badly placed to cope with such a problem as they didn't even make a proper risk management of their interest rate exposure," Hans-Peter Burghof, of the University of Hohenheim, told DW.
The failures of SVB and Signature Bank have "exposed the inadequacy of regulatory reforms that have been made since the global financial crisis," said Arthur Wilmarth, a law professor at George Washington University.
Wilmarth noted that SVB had grown rapidly from 2020 to 2022 and that its exposure to long-term fixed-interest bonds made it especially vulnerable to the shift in monetary policy by the Federal Reserve. "That's almost a sure-proof formula for failure. If the economy turns you begin to have trouble," Wilmarth said.
Banking regulations that would have put the bank under stricter oversight were diluted in 2018 under the Trump Administration.
"I'm going to ask Congress and the banking regulators to strengthen the rules for banks to make it less likely this kind of bank failure will happen again, and to protect American jobs as a small business," US President Joe Biden said on Monday.
