The simultaneous fall of two banks in the United States, the Silicon Valley Bank (SVB) and the Silvergate Capital Corp (SCC), which occurred in recent days, has begun to branch out in various economic sectors and countries, setting off alarm bells from regulators and central banks in the main world financial centers.
He BLSone of the 20 largest commercial banks in the United States, also operates in Canada and England (locations where its operation has already been disrupted) and has branches in China, Denmark, India, Germany, Israel and Sweden.
Contagion effect of the Silicon Valley crash
In USA the body that insures deposits for up to $250,000 per depositor, the Federal Deposit Insurance Corporation -FDIC- together with the Central Bank of that country -Federal Reserve- and the Treasury are working against the clock to create a vehicle (or find a “financial girlfriend” for the SVB) that will ensure the return of the totality of the deposits in these two institutions before the opening of operations. Using data as of the end of last year, only 5% of the nearly $170 billion in deposits held by the SVB were insured by the FDIC.
on this occasion The crisis originated in two banks of different sizes and profiles located on the west coast of the United States that stopped operating and were intervened in recent days because they were unable to cope with the massive and abrupt withdrawal of their clients’ deposits.
Both financial entities shared a problematic characteristic: their deposits were concentrated in specific sectors.
The fall of the largest, Silicon Valley Bank (SVB) represents the second largest in the entire banking history of the United States. In this case, their deposits were concentrated in investors and entrepreneurs from the technological universe. At the end of 2022, SVB’s assets exceeded 200 billion dollars.
The other (much) smaller bank to collapse Silvergate Capital Corp (SCC) had investors from the crypto world among its main clients. At the end of last year, its deposits fluctuated at 4 billion dollars (having suffered a drop of 8 billion deposits in just that last quarter of 2022).
Systemically analyzed, the main cause of these collapses has been the rise in interest rates by the Central Bank of the United States that occurred during the last year.
The sequence of the rise and fall of both banking institutions was as follows. During 2020 and 2021, when interest rates in central countries were almost zero, global investment funds (later imitated by millions of retail savers) diversified a portion of the funds they managed by investing in the crypto sector and in new technological ventures. . As a result of these movements, the two banks (now failed) that had a “friendly” operation towards these sectors received a flood of funds and saw their liabilities increase (and concentrate) exponentially.
These deposits were placed by these banks during 2020 and 2021 in low-risk instruments, such as bonds issued by the United States Treasury (treasuries), other instruments that have mortgage guarantees (mortgage backed securities) and similar assets.
But since the short-term rates at that time were very low, the banks did not invest in the most liquid instruments and with the least price risk, but preferred to make more profitable (obtain higher yields) those placements by buying the bonds of those same issuers at Fixed rate but longer terms. By simple mathematics, fixed-rate bonds fall more in price when their terms are longer and the yields in that market rise in price.
The checkmate to the continuity of these banks crystallized last week occurred, then, as a result of the effects that the rise in interest rates in 2022 had on both sides of the balance sheets of these institutions. On the side of their liabilities, both the main players in the crypto and venture capital sectors began to massively withdraw deposits from these two “friendly” banks in the last quarter of 2022.
This happened due both to the departure of large investors from risk assets (typical behavior in periods of rising interest rates with the consequent drop in the prices of those assets) and to the various frauds that became known in the crypto world. (Celsius and FTX, among others). On the side of the assets of these two banks, the rise in interest rates meant that the bonds that they had to sell abruptly to face the flight of deposits had to be made at a loss, accelerating the decapitalization of these institutions.
A side blow of this crisis was suffered by the (supposedly) stable segment of the crypto universe, the exposure to the SVB bank of the Circle company that issued the USDC cryptocurrency caused the price of this tokenized dollar to fall last Saturday by more than 10% and then start to recover slowly.
While the technological entrepreneurial companies and those that finance these activities see a harsh winter looming, some maximalists of the native crypto world are excited, without many elements, that, unlike last year, bitcoin this time will achieve its embryonic objective of acting as refuge from the difficulties of the traditional financial system.
Regarding the responsibilities of the financial regulators in this crisis, there will be time to define responsibilities: that they did not adequately calibrate the concentration of deposits that these two banks maintained with specific fragile sectors, that they did not anticipate the risks of mismatches in interest rates, market and liquidity in which they were incurring, etc, etc. But As in past crises, once the storm has passed, we will surely find ourselves in a financial world that is more regulated than the current one.
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flickr
In the very short term, and regardless of how the situation of these two institutions is resolved, of the expected reassuring statements from all the actors, it is highly probable that in this scenario of uncertainty a process of wealth destruction will begin, large investors will withdraw and adopt conservative behaviors until they are sure of the extent of the damagegenerating falls in risk assets, higher deposit withdrawals and difficulties in financial institutions of various types.
The speed and effectiveness of the measures taken in these cases is key. If the fire is neutralized when there are only a few sources, the damage to society and the public resources that must be used are much less than when the flames begin to spread. .
With its great differences, the experience of the 2008 crisis can serve as a mirror regarding how not to act, the lack of reaction and coordination between organizations and countries and the marches and counter-marches of the different public actors involved at that time ended up generating a cost gigantic in economic and social terms for the whole world. There is time, but the hourglass has already turned.
Carlos Weitz. Former president of the CNV. Professor of crypto assets and digital currencies in postgraduate courses at the University of Buenos Aires.
Source: Ambito
