Silicon Valley Bank (SVB) is not Lehman Brothers. 2023 is not 2008 and today’s Fed is not the same as then, not to say that the world has changed completely in just 15 years.
However, the bankruptcy of the US bank that occurred last week is proof that the era of cheap money is over (something that is not recent either), and that its effects are beginning to be reflected in the real economy. In fact, the systemic risk does increase and that was decisive so that last week the New York stock markets fell on average more than 4 percent.
The Silicon Valley Bank case and interest rates
The increase in interest rates in the United States, which last year was 425 basis points, raised the risks for many companies and banks, and at the same time reduced liquidity to a hitherto unknown number of credit users around the world due to the economic slowdown.
Silicon Valley Bank simply stopped receiving sufficient and/or necessary flows to maintain the business cycle, that is: attract resources, lend those resources with the backing of its capital, and collect the borrowed resources plus the respective interest to restart the process.
Given the situation and after a time that is not known eitherduring which the bank began to lose capital because it surely used funds from its capital to meet all its obligationsWaiting for its clients to return with their payments, the bank launched a plan to recapitalize its finances by issuing bonds for an amount of up to 2 billion dollars. This signal was not well received by the markets, who immediately detected that this plan was due to the fact that, simply and simply, the bank had capital problems, the immediate response of the market was a 60 percent drop last Thursday in the price of his action.
On Friday, when barely 30 minutes of operations had elapsed, the stock fell another 25 percent and an hour and a half after the collapse it was 60 percent, for which the stock exchange authority had to declare the suspension of trading.
In those hours of the morning and until around noon, the bank had changed its plans and was desperately looking for a buyer, but to no avail. Finally, the financial authority of the United States decided to declare the bankruptcy of the institution (legally the bank was intervened by the Federal Deposit Insurance Corporation (FDIC, for its acronym in English).
Silicon Valley Bank simply couldn’t prevent collapse by dumping $21 billion worth of investmentswhich he could no longer keep in his portfolio due to the clear deterioration due to the rate hike and the possibility that these rise more, which generated a loss of 1.8 billion dollars.
According to figures from Bloomberg with figures from the FDIC itself, at the time of the bankruptcy Silicon Valley Bank had 17 branches in the states of California and Massachusetts and had assets of approximately 209,000 million dollars, in addition to 175,400 million dollars in deposits.
This bank was considered the sixteenth in the US banking system which is made up of approximately 5 thousand institutions between commercial banks and savings institutions. In other words, it was a major, or very major, bankruptcy.
The big question is, will it be the only bank in these conditions? If the sixteenth bank in the US financial system collapsed due to financial insolvency caused by the increase in interest rates, How many more could be in that circumstance and declare bankruptcy in the next few days, weeks, or months, as interest rates rise higher?something that by the way will be inevitable if we listen to the words of the president of the Fed, Jerome Powell, this very week.
Bankruptcy of the SVB, many implications
The bankruptcy of Silicon Valley Bank (SVB) has and will have many implications, it is not fortuitous to point out that its collapse increases the systemic risk in the United States and possibly in many parts of the world, not only because of the size of the institutionbut because it served sectors highly sensitive to the financial system and demonstrates that we are facing possible contagion inside and outside the financial system.
As we know, banks are not isolated entities, they are in fact the most interconnected companies in any economy and therefore a bankruptcy has many implications.
Banks have connections with their depositors, to whom they are responsible for the resources that they lend them for safekeeping. They are responsible to their borrowers, both for charging them and recovering the borrowed resources, and for maintaining the lines of credit in their various varieties. They have connections with other banks through interbank operations that are made in any banking and financial system in the world. Banks lend to other banks and receive loans, even exchange mortgages, and many more operations. Banks are responsible to the governments of the countries in which they operate, both for maintaining their healthy operation and for functioning as windows for various procedures and payments.
Therefore, again the questions about to what extent other firms will be hurt by the implosion of Silicon Valleyare maintained in the environment.
Nor is it by chance that the large firms in the US banking system have been affected in the sessions on Thursday and Friday.
On Friday alone, the losses were for all banks equally: Bank of America fell 6.20 percent in its stock; Wells Fargo Bank fell 6.18 percent; JPMorgan was not far behind, down 5.41 percent and Citigroup was down 4.10 percent. Last Friday’s session was, in fact, the worst session for the banking system since the pandemic period.
Powell calms markets: Fed still hasn’t decided how much interest rates will rise
Portfolio impairment and credit restriction
Apart from the financial situation of the banks, which would put other institutions in the United States and the rest of the world at risk, another of the severe implications for practically the entire economy would have to do with the deterioration of the banking portfolio, that is to say that payment defaults will increase; in addition to the credit restriction.
That is to saybanks will think hard to lend money, that restricts activity and economic development, one more vicious circle that the economy will face around the world. That includes Mexico.