At that time, all kinds of dubious mortgages were being sold across the global system, says De Jong. “Those mortgages then had to be valued at market value, but there was no market and so the banks were forced to write off the money to a large extent.”
Bank run
The current problem is less serious, but the economist sees risks. The financial system is built on trust, and bad things can happen if people lose trust, according to De Jong. For example, a bank run can occur if depositors at other banks also sense the danger and decide en masse to withdraw their money.
San Francisco’s Silicon Valley Bank had to close its doors on Friday after a similar bank run. More than $40 billion has been withdrawn from depositors. The SVB mostly financed start-ups and with a balance sheet of $200 billion, the bank was not large, but certainly not small, according to De Jong. “The peculiarity of the SVB was that deposits were only covered about ten percent by the American deposit system, which is very little.” According to De Jong, you run the risk that when depositors get nervous, they will quickly ask for their money.
‘The risks that Silicon Valley Bank has taken, for example, ABN Amro would never have taken’
Furthermore, the SVB had bought many bonds at a time when the economy was booming and interest rates were favourable. Now that the US central bank, the Federal Reserve, has raised interest rates, those bonds have lost value. When depositors subsequently withdraw money, the bonds have to be sold at lower prices and, according to the economist, the SVB has thus created a liquidity risk. “The risks that Silicon Valley Bank has taken, for example, ABN Amro has never taken.”
Firewalls
To prevent a similar bank run elsewhere, the US government is now building a kind of “wall of fire,” notes the economist. “The US government has said that those who lost money as a result of the Silicon Valley Bank collapse will be compensated. In doing so, they force the collective banking system to bear any losses.’ According to the US government, the taxpayer will not contribute a cent to this, but the banking system must ensure that deposits are repaid.
US President Joe Biden says those who wreaked havoc on the US banking system due to the collapse of the SVB will take it “full consideration”. Biden argues that American people and businesses can “trust that their bank balances are there when they need them.”