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Tuesday, March 21, 2023

After US bank failure: Fed crisis meeting

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California regulators have shut down Silicon Valley Bank. What are the consequences?
Image: APA/AFP/Noah Berger
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After the bankruptcy of the US bank Silicon Valley Bank (SVB), the financial markets are concerned about further collapses. Crisis meetings were therefore scheduled for the weekend in the USA, but also in Great Britain. The aim is to prevent the bankruptcy from affecting other companies. The bank, which specializes in financing technology companies in California, is already putting pressure on numerous start-ups that are now having problems continuing to pay their employees.

Experts blame the strong interest rate hikes in the US for the problems of the SVB. After more than a decade of zero interest rates, however, cracks are now appearing in the financial system. Some investors fear that the sudden change in course will now take revenge.

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The bankruptcy of the Santa Clara-based SVB is the biggest collapse since the global financial crisis of 2008. The institution had assets of $209 billion on its balance sheet at the end of 2022, making it the No. 16 in the US banking industry. So far, investors in particular have suffered from the bankruptcy. But that could change, experts fear. Well-known investors such as Kyle Bass and Bill Ackman are calling for the government to act quickly to prevent customers from en masse withdrawing their bank deposits. At SVB, customers had withdrawn $42 billion in just one day. The Californian supervisory authority then pulled the plug on Friday and closed the institute, which shortly before had paid employees some lavish bonuses.

Because of the size of the SVB, the circle of possible rescuers is limited. According to a report by the Bloomberg agency, the Fed and the US deposit insurance company FDIC are discussing a backup solution for institutions that could now also come under pressure. An attempt could be made to reassure bank customers in order to avoid panic.

While some fear a domino effect on the financial markets, other experts consider the previous panic to be completely exaggerated. Former Treasury Secretary and Professor at Harvard University, Larry Summers, speaks of an overreaction. As long as the crisis at the SVB is properly managed and customer funds are paid out, no systemic risks for the banking sector can be expected. Joachim Klement from the investment bank Liberum Capital spoke of growing fears of a credit crunch. However, he does not believe that the situation of the SVB poses an immediate threat to the European banking system.

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