Silicon Valley Bank is the largest bank to collapse in the US since the 2008 financial crisis and its fall on Friday raised fears for a moment of a new chain collapse like the one that shook the world economy then.
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To avoid a “contagion effect” in the rest of the banking industry, the authorities worked at full steam over the weekend.
This is how on Sunday afternoon it was announced that all depositors could withdraw their money and, at the same time, they reported the closure of a second bank: Signature.
In just three days, two banks went into a tailspin and were forced to end their operations.
This Monday, the president of the United States, Joe Biden, assured that the financial system of the nation is safe, reaffirming the attempt to project calm after the rapid and surprising collapse of the banking entities generated fears of a crisis more extensive.
“Their deposits will be there when they are needed,” he said, adding that bank managers will have to be fired and the money that will be returned to clients will not be paid for by taxpayers.
The return of these resources to all depositors will be financed with the Deposit Guarantee Fund (DIF), which was created for emergency situations.
This fund is regularly financed with quarterly payments made by the banks themselves and with the interest generated by government bonds.
Americans must “rest assured that our banking system is safe,” Biden has said. According to the president, SVB clients will be able to access their money starting this Monday.
The US president also addressed investors, telling them they will not be protected: “They took a risk and when the risk doesn’t pay off, investors lose their money. That’s how capitalism works.“
Experts say the government tried to shield itself from public anger sparked by the taxpayer-funded 2008 Wall Street bailouts.
But how did it get here?
Timeline of the crisis
The alarms went off last Wednesday, when the authorities of Silicon Valley Bank (SVB), number 16 by size in the entire United States, announced that they needed to raise US$2.25 billion to cover losses.
This generated panic among its clients, who by the end of the next day had withdrawn up to US$42 billion from their deposits, leaving the entity in an unsustainable situation.
US regulators had no choice but to shut down the bank on Friday and seize control of its clients’ deposits.
Trying to avoid a crisis of confidence in the banking system, on Sunday the US Federal Reserve, which acts as the country’s central bank, announced that it will guarantee all the bank’s deposits, containing, for the moment, the panic.
What is Silicon Valley Bank?
Silicon Valley Bank was founded in 1983 in Santa Clara, California, and has experienced rapid expansion in the past decade.
Its main clients, as its name suggests, have been technology companies based on the west coast of the US.
There has been a crucial lender for many emerging companies, known as start-ups.
In fact, SVB was the banking partner for almost half of the US-backed healthcare and technology companies listed on the stock markets last year.
Why has it collapsed?
Two main factors have rocked the bank in the past year: the fall in the value of shares of technology companies and the aggressive rise in interest rates in the United States to deal with inflation.
The bank had bought in the last two years, with customer deposits, a large number of fixed-income bonds, an investment that is usually considered safe.
This would not have been of much consequence if they had been able to hold those bonds for several years. However, the current economic situation has led many of its clients, lacking liquidity, to decide to use their deposits.
These clients could not find another way to finance themselves and continue paying, for example, the salaries of their workers since, due to the high interest rates, they preferred not to get into debt and they did not find large investors who wanted to take risks by allocating funds to start-ups.
In this way, SVB’s clients began to withdraw their deposits, and the bank, since it did not have enough liquidity to meet their demands, was forced to sell those bonds at a loss.
And in this way it came to last Wednesday, March 8, when the bank announced that it was trying to raise US$2.25 billion to cover those losses.
The announcement triggered a fear spiral, with clients starting to withdraw their funds for fear of losing them.
Because deposits were insured up to $250,000 under U.S. law, customers and companies whose funds exceeded that figure — nearly 90% of Silicon Valley Bank accounts — feared that a bank failure could cause them to lose all their money.
Panic began to spread until on Thursday the entity’s shares plummeted more than 60%.
What has the Federal Reserve done?
On Sunday, fearing a crisis of confidence in the banking system, the Federal Reserve and the government announced new emergency funds to protect all SVB deposits, not just insured ones.
The US authorities wanted to put all their weight to calm the markets. On the same Sunday night, after a hectic weekend, Janet Yellen, Federal Reserve Chairman Jerome Powell and FDIC Chairman Martin Gruenberg assured in a joint statement that all customers, including those whose funds exceed the maximum level insured by the government, will be reimbursed.
This will not only affect Silicon Valley Bank but also another smaller entity, New York-based Signature Bank, which was shut down by the FDIC on Sunday.
Signature’s clients were also heavily tied to the technology and cryptocurrency sector.
On the other hand, the Federal Reserve also announced that it will offer assistance through a new financing program, which will make it easier for banks to obtain loans in a crisis.