There currently are some major concerns over an international banking crisis after three American banks collapsed in March 2023 (Silicon Valley Bank, Signature Bank, and Silvergate Bank; all catering largely to the tech sector), while it necessitated an acquisition by rival UBS to prevent Switzerland-based global investment bank Credit Suisse from collapsing. This brings back the haunting memories of the 2008 financial crisis.
Back then, in 2008, certain banks were left holding trillions of US dollar of worthless investments in subprime mortgages amid cheap credit and lax lending standards. Today, one of the key problems of banks is worthless (long-term) US treasuries after the US Federal Reserve aggressively raised its benchmark interest rate.
On 10 March 2023, the Federal Reserve examined the finances of California-based Silicon Valley Bank (SVB), a regional bank, and found some major problems related to SVB’s liquidity and insolvency. SVB’s efforts to raise more than USD $2.0 billion in additional capital failed amid a rapid outflow of deposits (on 9 March 2023 investors and depositors tried to withdraw a total of around USD $42.0 billion from the bank). This collapse of SVB was the largest of any bank since the 2007–2008 financial crisis (by assets).
The reason why SVB collapsed is a combination of factors. SVB had already started to incur steep losses in 2022 after the Federal Reserve (Fed) tightened its interest rate environment in an attempt to combat high US inflation. Meanwhile, at the same time, there occurred a major downturn in growth in the tech industry (as growth in the tech industry normalized after it had enjoyed huge growth in 2020-2021 related to the COVID-19 crisis).
Considering SVB was a key player in the tech and venture capital community, it had accumulated huge deposits from its tech clients in 2020-2021. Massive liquidity was used by SVB to invest in US government bonds (typically ranking among the safest investment instruments) when interest rates were still low. However, government bonds go down in value when interest rates rise, and so these US government bonds that were on the balance sheets of SVB were suddenly quite worthless. Obviously, these ‘worthless’ government bonds are a problem for the whole banking industry, but it particularly are the smaller banks that are vulnerable due to limited buffers.
Only two days after big trouble started at SVB, New York-based commercial bank Signature Bank was closed by the New York State Department of Financial Services after nervous clients started withdrawing deposits in favor of bigger institutions. It had forced Signature Bank to ask other banks for money. Interestingly enough, this bank had moved away from real estate to cryptocurrencies. By early 2023, Signature Bank had transformed into the second-largest provider of banking services to the cryptocurrency industry (second only to Silvergate Bank; another regional bank that collapsed in March 2023, which is discussed briefly below). Signature Bank's failure was designated as a ‘systemic risk’ to the US financial system, and so this allowed for extraordinary measures to be taken by regulators to ensure the availability of funds beyond the Federal Deposit Insurance Corporation-insured USD $250,000 for each depositor.
Main problems for Signature Bank were essentially the same as SVB. However, what particularly caused trouble in the case of Signature Bank was that cryptocurrencies have been under significant pressure since November last year. Moreover, markets had already grown highly concerned over the banking industry, and therefore it was certainly no coincidence that on the day SVB collapsed, Signature Bank faced a huge bank run.
This is part of the article. It discusses the following:
- How the crisis started at three regional banks in the US;
- How it spread to Credit Suisse;
- What regulators did to ease the banking crisis;
- The importance of trust in financial institutions;
- How the financial economy has become huge as both the money supply and debt have been growing at a much faster pace than the underlying real economy;
- Can the banking crisis spread to Indonesia?
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