The sudden collapse of the Silicon Valley bank on March 10 caused panic among depositors in many banks, large and small.
Is the banking crisis that began last month over?
Is it almost over, or just the beginning?
Opinions differ.
On March 10, regulators abruptly shut down the Silicon Valley bank to prevent the Bank of California’s troubles from spreading to the entire banking sector.
SVB, based in Santa Clara, California, has been the first lender to many technology companies. Provided expert financial services, industry expertise, valuable network and reputation. It also provided a range of financial services tailored to the needs of startups, such as project debt, corporate banking and asset management. These services are designed to help startups manage their finances, improve cash flow and expand their business.
Founded in 1983, Silicon Valley Bank (SIVB) – Get a free reportPresenting itself as a “partner in the innovation economy”, it offered higher interest rates on deposits than its larger competitors, to attract clients, and then the company invested its clients’ money in long-term treasury bonds and mortgage bonds with strong yields.
The main issue
This strategy has worked well in recent years. The bank’s deposits doubled to $102 billion at the end of 2020 from $49 billion in 2018. In 2022, the deposits increased to $189.2 billion.
But everything turned upside down when the Federal Reserve started raising interest rates, making the existing bonds held by the SVB less valuable. As a result, the bank was forced to sell the bonds at a discount to cover the withdrawals of its customers. In selling these bond positions, SVB was to incur a significant loss of $1.8 billion.
Because of this loss, SVB suddenly announced that it needed to raise an additional $2.25 billion in capital, through the issuance of common and convertible preferred shares. This decision caused a panic and a run on the bank.
Since then, fears of the multiplying effect have spread like wildfire, threatening the banking sector, despite the fact that banks too big to fail have been subject to stringent regulation since the 2008 financial crisis.
In addition to SVB, fears of infection have already led to the closure of Signature Bank in New York (SBNY) – Get a free reportSince then, concerns about deposits in other small banks, that is, those with assets less than $250 billion, have increased, especially because the Federal Deposit Insurance Corporation (FDIC) only guarantees deposits less than or equal to $250,000. Basically, all individuals with more than $250,000 in their account—anything above the FDIC threshold—would lose if the bank defaulted.
Despite assurances and declarations from the regulations about the solidity of the US banking system, depositors have scrambled in recent weeks to withdraw their funds. According to Federal Reserve data, Americans withdrew $120 billion in deposits from small banks during the week ending March 15th.
Small banks saw their deposits stabilize in the week of March 22nd. However, deposits at smaller banks were still down about $216 billion during the week ending March 22 from their December high.
This trend will accelerate
Federal Reserve data showed that large US banks lost $96.2 billion in deposits in the week ending March 22nd. Many analysts attributed the decline to depositors shifting their funds into money market funds with higher returns.
In this context, Elon Musk, CEO of Tesla, owner of Twitter, and former co-founder of PayPal, just warned of a silent banking administration that could accelerate. This warning came during a thread on Twitter. An account that the billionaire interacts with regularly posted a message that US banks are still facing massive withdrawals of funds from their customers.
“Trillions of US dollars are being drained from banks…in money market funds. This is weakening banks,” the Twitter account wrote on April 7.
And she continued, “Fear of bank exposure is driving this trend and thus making banks weaker.”
The transfer of cash from bank accounts to money market funds is a trend explained by the fact that these short-term investments offer higher returns than traditional bank accounts. However, the depletion of bank deposits can lead the bank to a liquidity crisis, similar to what happened with SVB.
Musk appears to share this point of view. It is even believed that this phenomenon will accelerate. Basically, things will go from bad to worse.
“This trend will accelerate,” the billionaire said, without providing further details.
On the other hand, the big banks have a more positive outlook. This was stated by Jamie Dimon, CEO of JPMorgan Chase. In an interview with CNN on April 6, he said that the banking crisis is almost over.
Could there be more bank failures? “I don’t know. But if there is, frankly, it will be resolved,” Dimon told CNN on April 6. “I think we’re nearing the end of this particular crisis.”
The banker also reiterated that the problems that led to the failure of the SVB were “hiding in plain sight” and should have been discovered by the bank’s management.