New York, US | BAZZUP | The failure of Silicon Valley Bank (SVB) not only exposed billions of dollars in losses but also shook the technology sector, which had been at the forefront of innovation in recent years but had been troubled for months by layoffs and bankruptcies.
Small companies and startups with the bank serving as their only bank account were left without a solution. Investors were rushing to take precautions against potential market turbulence. Furthermore, the American government’s pledge to allow depositors access to their funds will not allay concerns about a systemic contagion.
According to a Financial Times report, experts claimed that if lawmakers had not recently loosened regulations for some lenders, warning signs of SVB’s demise could have been identified.
The Dodd-Frank Act in the United States had mandated that banks with more than $50 billion in assets be subject to close regulatory oversight, but the 2018 reversal increased the bar to $250 billion, making the act ineffective for shielding customers from bank abuses.
According to the New York Times, despite the fact that SVB’s asset size increased at an explosive rate, from 45 billion dollars in 2016 to more than 200 billion dollars by the end of 2022, the bank fell short of the minimum standards for capital and liquidity as well as stress testing.
The truth is that SVB has a lot of long-term bonds because it ist on low interest rates. To combat inflation, the U.S. Fed raised rates by 450 basis points in a year.
According to FT, central banks and regulators are to fault for failing to set higher criteria and giving interest rate risks insufficient attention.
In an interview with Consumer News and Business Channel, investment consultant Liz Ann Sonders cited the proverb that the U.S. Federal Reserve tightens until something breaks. “This (SVB) is definitely an example of something breaking,” I believe.
The failure of SVB, the biggest bank failure since that of the US savings and loan Washington Mutual in 2008, has major impact on the entire world’s financial systems.
On Sunday, American regulators shut down New York-based Signature Bank, a significant lender in the cryptocurrency sector, alleging systemic risk. 48 hours had passed since the SVB’s collapse when the decision was reached.
According to media estimates, Monday’s trade on European stock markets resulted in losses of 291 billion euros (311 billion US dollars).
The British pound gained the most in several weeks, reaching a price of about 1.22 US dollars. The decline “has harmed the U.S. dollar since market pricing of interest rate expectations has substantially changed,” according to market analyst Kenny Fisher from online forex trading platform and broker OANDA.
Asian markets also fell, with banks “taking the brunt of the selling on fears of contagion in the sector,” according to French media Agence France-Presse, and 465 billion US dollars were lost in the SVB fallout over the course of two days, per Bloomberg News.
Regulators closed the previously 16th-largest bank in the US on March 10. The biggest lender in Silicon Valley, SVB had frequently underwritten deals for tech start-ups.
The action was taken after the bank disclosed that, as a result of higher interest rates, it had lost 1.8 billion dollars in the sale of U.S. Treasury bonds and mortgage-backed securities it had purchased.