The banking system is swaying.. Will the world witness a repeat of the 2008 financial crisis?[rtl]proposals from[/rtl]Arab and International / Economy |Yesterday, 22:14
Baghdad Today - Follow-up
Is the world witnessing a repeat of the 2008 financial crisis, which started in the same way in America?
After the start of an eventful week that sparked panic in the banking sector in America and around the world as well, US regulators said that customers of the bankrupt bank will be able to access their deposits starting from Monday, March 13, and the regulators also established a new facility so that banks can obtain financing. Emergency. The Federal Reserve (the US central bank) took a decision to make it easier for banks to borrow from it in emergency situations.
What is the story of the Silicon Valley bankruptcy?
Before getting into the details of the bailout and what it means, let's tell the story from its inception. Silicon Valley Bank SVB or Silicon Valley Bank, which is the most famous headquarters of American technology companies, was founded in 1983, and for nearly 4 decades it has been a small bank that almost no one knows about.
However, during the past two and a half years (2020-June 2022), the bank has witnessed a significant inflation in customer deposits, and most of these depositors are the owners of emerging technology projects or Start-Ups.
By the middle of last year, deposits with Silicon Valley Bank had peaked at nearly $210 billion, and the bank was investing that money in long-term (mostly 30-year) US bonds. The bank was offering high interest to depositors, as one of the tools to attract liquidity to it.
But since the second half of 2022, and with the US Federal Reserve continuing to raise interest rates since March 2022, until today, deposits have left the bank, for their owners to invest in short-term bonds. For short-term bonds, up to a maturity of 3 months or 6 months, their returns exceeded 5%, meaning that they are more profitable than staying in the bank and obtaining a return that does not exceed 3.5%.
In front of these withdrawals from deposits, the bank found itself facing a liquidity crisis represented in its inability to continue paying interest on the remaining deposits, amid a slowdown in bank lending due to the rise in interest rates globally.
Also, the bank could no longer afford to withdraw more deposits from customers, a development that came in conjunction with the collapse of a cryptocurrency bank in the US market, Silvergate Bank, last week.
SVB Bank was forced to sell a portfolio of bonds worth $21 billion, in which it lost about $1.8 billion, and offered shares worth $2.25 billion, with the aim of providing liquidity.
At dawn on Friday, March 10, 2023, Moody's credit rating agency issued a report in which it downgraded the bank's credit rating, which resulted in what is called a "Bank Run", that is, depositors rushed to withdraw their money. And officially, the California banking regulators announced, on Friday, the closure of the Silicon Valley Banking Group, which is responsible for Silicon Valley Bank.
The announcement of the collapse of the "Silicon Valley" bank surprised investors and revived concerns about the strength of the banking sector as a whole, especially with the rapid rise in interest rates leading to a decline in the value of bonds in their portfolios.
What is the impact of this bankruptcy on the banking sector globally?
In London, the British government said it was working on a plan to allow British technology companies to maintain their liquidity after the bankruptcy of the Silicon Valley Bank, as the British Treasury said: “We want to reduce the damage caused to some of our promising companies in the United Kingdom after the bankruptcy of the American bank.”
The bank's UK subsidiary was filed for bankruptcy as of Sunday evening. Chancellor Jeremy Hunt said he, along with Prime Minister Rishi Sunak and Bank of England Governor Andrew Bailey, worked late into the weekend to find a solution to the fallout from the collapse of Silicon Valley in the UK.
Hunt told the BBC that there was no risk to the UK financial system as a whole after the collapse of Silicon Valley, "but there are serious implications for some of our promising companies in technology and life sciences, these are new important companies for the United Kingdom, and they are a very important part of our future.”
"We want to find a way to reduce or avoid all the losses that the incredibly promising companies have incurred," Hunt added, stressing at the same time that he could not commit to any guarantee that companies would get all their money back. He said the government was "working rapidly" to present a plan to ensure that businesses can meet their liquidity needs "within the next few days".
This plan means companies can pay their employees, he said, "that's the big question we've been asking over the past 24 hours."
More than 250 heads of technology companies in the UK had signed a petition addressed to Hunt calling for government intervention. A source at a technology company told the BBC: "It looks like it could be a beautiful tech station in the UK. This Monday at least 200 companies, employing tens of thousands of people, will find themselves unable to pay their staff or suppliers because The bank she has an account with has gone bankrupt."
The source added that between 30% and 40% or start-ups in the UK employing up to 50,000 people could be affected by the crash.
What does the Biden administration's rescue intervention mean?
In this context, the US administration, on Sunday evening, rushed to take a series of emergency measures to boost confidence in the banking sector, in an attempt to avoid triggering a systemic crisis on a larger scale, similar to what happened in the financial crisis in 2008. Regulators also moved quickly to close a bank New York-based Signature, which has been under pressure over the past few days.
President Joe Biden said Sunday evening that the Treasury secretary and the head of the National Economic Council worked diligently with banking regulators to address the problems at the two banks. "The American people and American businesses can trust that their bank deposits will be there when they need them," Biden said in a statement.
Biden's announcement came to confirm reports that the US administration had intervened to save the situation before it ravaged the banking sector. US Treasury Secretary Janet Yellen said she was working with banking sector regulators to address the collapse of Silicon Valley. With growing concern that the bank's collapse could have a domino effect on other banks in the United States, Yellen said she was working to protect depositors, but ruled out a bailout plan.
Yellen told CBS News: "We want to ensure that the problems facing any of the banks do not pass on to other banks." She added, "During the financial crisis, bailout plans were drawn up for investors and owners of large banks... and the reforms that were implemented mean that we will not do this again."
Although the FDIC protects deposits of up to $250,000, there have been concerns about deposits over that, and many small businesses are at risk of not being able to pay their employees.
Amid mounting withdrawals from other multi-branch banks, US officials are keeping a close eye on the broader sector. More than 3,500 CEOs and founders, representing about 220,000 employees, have signed a petition, launched by Y Combinator, that directly appeals to Yelin and other officials to support the depositors, warning that more than 100,000 jobs are at risk.
The fact that Santa Clara, California-based Silicon Valley Bank is the 16th largest US bank with $209 billion in assets makes the list of potential buyers who can execute a deal relatively short. Informed sources said, on Friday, that the Federal Deposit Insurance Corporation, which took over the judicial custody of the bank, is seeking to find another bank this weekend ready to merge with Silicon Valley Bank.
But the Biden administration's intervention to save the situation angered some lawmakers in Congress and some economists as well. As they believe that the administration’s intervention to save the situation serves only the owners of technology companies and bank owners, who gamble with depositors’ money, which may open the door for everyone to follow the same steps, and in the end taxpayers bear the exorbitant bill.
“The actions of the Treasury Department, the Federal Insurance Institute, and the Federal Reserve that are taken today to protect deposits at two of the most important banks in the banking system will have enormous long-term ramifications for the American economy that many do not understand,” said Bert Elley. Director of a banking consulting firm, for the US Axios website.
The same was expressed by Britain's Permanent Secretary of the Treasury Nick Jefferson, who said via Twitter that the government's commitment to any more protection than this would be a "serious moral transgression". In other words, depositors will not have the incentive to take the necessary measures to protect against such risks if they expect that the government will intervene every time to pay in full in the event of the bankruptcy of any bank in the United Kingdom.
But US officials said the intervention did not mean a "bailout," and the US Treasury, Federal Reserve and Federal Deposit Insurance Corporation said in a statement: "Taxpayers will not bear any losses related to the Silicon Valley decision."
A senior US Treasury official told Reuters that the new policies approved by regulators regarding the closure of Silicon Valley and Signature banks were taken to stabilize the financial system and protect depositors, and did not constitute a financial rescue plan for either of them.
The official stated that the steps would "restore market confidence" along with the Federal Reserve's decision to make money available to qualified financial institutions, and ensure that they can meet the needs of all depositors.