On March 10th, Silicon Valley Bank (SVB) collapsed and shut its doors. SVB falling makes it the largest US bank to collapse since Washington Mutual did in 2008. SVB had a liquidity crisis and was over-leveraged. To free up cash they decided to try and sell shares, but that ended up failing which then triggered a panic and customers were not able to get their deposits. The FDIC now has control of the bank and has ultimately considered it insolvent.
First Republic Bank has been struggling too over the last week and there have been aggressive efforts by other lenders and the U.S. government to avoid another bank run. So far other banks have lended out over $200 Billion to this cause. Jamie Diamond noted that banks still need a lot of money to solve their liquidity issues and that big banks like JPMorgan, Citi, and Bank of America will continue to lend money out to hopefully stop this issue.
SVB got into this crisis by investing into a lot of long-term bonds when interest rates were super low. When inflation rose, the value of the bonds dropped and depositors wanted higher rates, so the bank was forced to sell off some bonds at a loss which caused them to lose liquidity. When this hit mainstream media, people panicked and SVB could not maintain the withdraws and a bank run occurred. Another part of it was that SVB also invested in risky Tech Venture Capital and the technology sector got crushed in 2022 which caused the bank to along with VC to get crushed. The bank managed the risks they had made poorly and their heavy involvement with technology ultimately hurt them in 2022 which caused SVB to collapse.
In terms of the whole economy, this increases the odds of a recession because banks are supposed to have cash on hand and maintain a financial system. Customers are also afraid now due to them believing that they may not be able to collect their deposits. Most banks are over-leveraged with debt and GDP has gone down which can indicate a possible recession. Also the yield curve is inverted where short-term interest rates are significantly higher than the long-term interest rates. Contractionary policy and an illiquid economy make for a fearful situation. I think that we are guaranteed to enter a painful recession that will cause the banking system to rapidly change to avoid this issue again.
Link: https://www.cnn.com/2023/03/17/business/global-banking-crisis-explained/index.html
2 comments:
The collapse of Silicon Valley Bank due to a liquidity crisis and being over-leveraged has significant implications for the US economy. The collapse of the bank causes panic among its customers who cannot get their deposits, leading to a bank run. The crisis highlights the over-leveraged nature of most banks and their exposure to risky assets, such as Tech Venture Capital, that can lead to significant losses. The increased fear and uncertainty among customers regarding the safety of their deposits, combined with an illiquid economy, contractionary policies, and an inverted yield curve, increases the chances of a recession.
Hello Brandon,
It is very scary to hear the word recession again after we thought the worst of it was over. SVB is in very deep water and needs to find a way to decrease its leverage. It is nice to know that the FDIC is now in control of the situation and that other banks are doing all they can to play their role by lending money to SVB. I am certain that this bank run will cause SVB to fail, sometimes for businesses technology is their downfall, given everything is public information nowadays.
Overall, great insight! Well done.
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