26 April 2023
The future appears questionable in light of Silicon Valley Bank and Signature Bank’s failure.
Numerous factors contributed to the failure of the Silicon Valley Bank (SVB), notably an inadequate amount of diversification and a traditional bank run, in which a large number of customers withdrew their savings simultaneously out of concern for the bank’s stability. The majority of SVB’s deposits were new businesses and because technology was in such high demand during the pandemic, they deposited huge sums of money from investors.
Inadequate Amount of Diversification
Silicon Valley Bank made significant investments in long-term US treasuries and agency mortgage-backed securities using bank deposits. However, as interest rates rise, the value of bonds and treasuries decreases. SVB’s bond portfolio began to decline in 2022 when the Federal Reserve raised interest rates to fight inflation. If SVB had kept the bonds until they were due to mature, it would have made its capital back.
Previously, Silicon Valley Bank made short-term loans. Instead of using short-term assets to cover their liabilities in 2021, they switched to long-term securities like treasury bonds in order to increase yield. Because they were unable to sell their assets without suffering a significant loss, they were insolvent for months.
Many bank customers withdrew their money when economic considerations affected the IT industry as venture capital began to decline. Due to the fact that these deposits were bound up in long-term investments, SVB lacked the liquidity necessary to liquidate them. They began offering their bonds for sale at a large loss, upsetting buyers and investors. The bank failed 48 hours after revealing the sale of assets.
Traditional Bank Run
People got concerned the bank was short on capital after SVB announced its $1.75 billion capital offering on March 8, 2023. When word of the bank’s lack of funds immediately traveled on social media platforms like Twitter and WhatsApp, panic was sparked and waves of customers began withdrawing their cash. On March 9, following the news of a capital raising, SVB’s stock fell by 60% with some claiming that the social media platform, Twitter, was the cause of the bank heist.
On March 10, Californian officials closed the bank and transferred SVB to the FDIC. Clients of SVB have substantially larger balances than those in personal banking hence why, money quickly ran out during the bank run. The majority of consumers had deposits that exceeded the $250,000 FDIC cap.
Many firms chose to keep funds in their SVB primary account rather than using other accounts, like a money market, to cover expenses. In order to pay their employees and pay their expenses, they required access to their deposits, which were mostly held in their SVB account.
What Has The SVB Collapse Taught Us?
The future appears questionable in light of SVB and Signature Bank’s failure. Whether or not the panic has diminished is the key question. A domino effect could occur if customers and investors keep selling equities and taking their money out of banks. In this situation, the Fed would find it difficult to continue fighting against inflation, and people might be forced to accept the terrifying reality of living with high prices. The ‘soft landing’ that was predicted now appears like a pipe dream, and a recession could be approaching for the Western world.
The failure of SVB has brought to light the necessity for banks to have effective risk management procedures in place and for regulators to retain strict oversight to avoid situations similar to this happening again. Additionally, it has shown the financial system’s flaws. A financial institution’s demise can have a significant impact, especially one as significant and well-known as SVB. It may cause customers, stakeholders, and investors to lose faith in the company, which could have an impact on the entire economy. Such a failure can have severe, protracted effects.
Banks must be proactive in identifying, evaluating, and managing risk. This entails putting into place efficient risk management frameworks, formulating precise statements of risk tolerance, and conducting continuing risk assessments to find possible threats and weaknesses.
To guarantee that banks are operating in a safe and sound way, regulatory oversight is essential in addition to these internal controls. To discover possible vulnerabilities before they become serious difficulties, regulators must uphold a strong supervisory structure that includes routine monitoring, stress testing, and risk assessments.
The Potential Effects Of The SVB Collapse To The APAC Region
Based on the lessons learned from the 2008 financial crisis, these are some general observations about how such an event could affect the APAC region:
Trade: The APAC region has become heavily reliant on exports to the US and other countries. A significant decrease in demand for goods and services from these countries due to a financial crisis like the SVB collapse could negatively impact the region’s economies.
Capital flows: A financial crisis can result in a sudden outflow of capital from affected countries, causing a liquidity crunch and currency devaluation. This can be particularly damaging to countries with high external debt and limited foreign exchange reserves.
Financial markets: A sharp decline in stock markets and other financial assets can lead to a decrease in investor confidence and a drying up of credit, which can further exacerbate economic issues in the APAC region.
Commodity prices: The APAC region is a significant exporter of commodities such as oil, metals, and agricultural products. A financial crisis can result in a decrease in demand for these commodities, leading to lower prices and reduced revenue for exporting countries.
In summary, the potential rippling effects of an SVB crash on the APAC region could include decreased trade, capital outflows, declining financial markets, and lower commodity prices, among other factors. However, the exact impact would depend on various factors, and it is challenging to predict the consequences of SVB’s failure on the APAC region with certainty.
