The Economist: The collapse of the Silicon Valley Bank... What does it mean for the US financial system?

The British magazine "The Economist" published

on the collapse of the "Silicon Valley Bank", and reviewed the causes of the collapse and its impact on the financial system in the United States, and talked about the possibility of the state's intervention to save the bank.

At the beginning of its report, the magazine introduced a definition of this bank, stating that it is the 16th largest bank in America with assets of $200 billion, and that it is a major lender to large emerging companies in the technology sector in Silicon Valley in California.

She said that the bank's share price - whose name is abbreviated "SVP" (SVP) - fell by 60% last Wednesday and then 70% yesterday Friday, and all its management's appeals to clients to support it failed, and finally it was announced to stop trading in its shares and seize the deposits of its customers. Which means announcing its collapse.

The cause of the crisis

The report indicated that the reason for the crisis that the bank was exposed to - which is the largest collapse of an American bank since the financial crisis in 2008 - is that its deposits have multiplied more than 4 times in 4 years (from $ 44 billion in 2017 to $ 189 billion at the end of 2021), while His loans to startups have grown from $23 billion to $66 billion.

And since banks reap profits from the difference between the interest rate they pay on deposits and the rate paid by borrowers, having a much larger deposit base than the loan book represents a problem whose solution requires the bank to obtain other interest-bearing assets, so we find that the bank has invested $128 billion by the end of 2021. , mostly in high-priced mortgage and treasury securities (peak rates).

Then the world changed - according to the report - and interest rates rose as inflation took hold and bond prices fell, leaving SVB Bank uniquely exposed, and customers reduced their deposits from $189 billion at the end of 2021 to $173 billion at the end of 2022.

The bank was forced to sell its entire portfolio of liquid bonds at lower prices than it was, incurring losses amounting to about $1.8 billion, which left a gap that it tried to fill by increasing the capital, but it did not succeed.

Is it an exception?

The report asked whether the crisis of this bank was an exception, saying that although it was exceptionally vulnerable to withdrawing depositors' money from it, almost all banks are exposed to losses in their bond portfolios.

And US Treasury Secretary Janet Yellen was quoted as saying that she is currently monitoring several banks in light of what happened to "SVB", and fortunately there is no danger to those banks at the present time.

And about the possibility of saving SVB, Ro Khanna, a congressman from the 17th district in California - which includes part of Silicon Valley - says that this bank is "the lifeblood of the technology ecosystem", and they cannot let it fail.

Government intervention is unpopular, the Economist said, but may be the only option.

Former Treasury Secretary Larry Summers said that if the state gets involved, there is no need to worry that the collapse of SVB will harm other parts of the financial system.

The Economist concluded its report by saying that many people hope that the matter will be as Summers said, and that he is right.