Fear of a ‘new wave of bankruptcies’ in the banking industry

While the bankruptcy of the Bank of Silicon Valley (SVB) went down in history as the “largest bank failure in the US” since the 2008 financial crisis, there have been concerns that it will trigger a “wave of bankruptcies” in the banking industry. .

News of the bank’s bankruptcy, which came as interest rate hikes continued in the face of high inflation and recessionary expectations were rising, further raised concerns in global markets.

Some banks had to realize losses on their bond positions after the US Federal Reserve (Fed) set a price that would raise the policy rate to one point above expectations.

SHARE PRICE LOSES MORE THAN 60 PERCENT

SVB, one of these California-based banks, announced it will raise more than $2 billion in capital on March 8, after closing its $21 billion bond position at a loss of approximately $1.8 billion.

SVB’s share price has plunged more than 60 percent in the past week as the market heard the bank ran out of liquidity.

PANIC INCREASED THE BANK’S LOSSES

Trading was suspended because the bank continued to lose after some venture capital investors advised companies to withdraw their money from the bank.

The rapid collapse of the SVB forced banking regulators to take action, and the US Federal Deposit Insurance Corporation (FDIC) announced on March 10 that it had appointed a trustee for the SVB, causing the fall of the SVB. the markets.

Industry insiders were also surprised by the FDIC’s decision to appoint a trustee for the bank, which it usually announced after the stock market closed, to limit potential customer losses, in the middle of the day.

Panic triggered by venture capitalists trying to overcome the liquidity crisis dragged the 16th largest bank in the US into one of the biggest bankruptcies in the country’s history in 48 hours.

LAST HAPPENED IN 2008

Washington Mutual experienced the largest bankruptcy of its kind during the 2008 crisis.

In late 2007, Washington Mutual, which had 43,000 employees, 2,200 branches and $188.3 billion in deposits, went bankrupt when the US housing crisis hit.

The bank’s operations were sold to JPMorgan Chase as Washington Mutual clients withdrew $16.7 billion in 10 days. Clients with uninsured deposits of the bank did not lose their money.

It is argued that the bankruptcy of SVB, whose deposits are mostly uninsured by the FDIC, may cause more pain for its clients than the bankruptcy of Washington Mutual.

THE WORLD OF TECHNOLOGY IS IN SHOCK

Founded in 1983 and specializing in the technology banking industry, SVB often provided financing to startups and venture capital.

The bankruptcy of SVB, which includes companies such as Shopify, ZipRecruiter and venture capital firm Andreessen Horowitz, sent shockwaves through the tech world.

The FDIC established the Santa Clara National Deposit Insurance Bank (DINB) to protect SVB insured depositors and reported that all SVB insured deposits were transferred there. In the statement made by the FDIC, it was indicated that customers can access their insured deposits no later than Monday morning.

It was reported in the US press that more than 93 percent of the $161 billion invested in the SVB was not insured by the FDIC.

The FDIC reported that future dividend payments may be made to uninsured depositors as the bank’s assets are sold.

Experts say the bank’s failure could have far-reaching implications for the world of technology and concern for banks.

DECREASE AND INTEREST ON CRYPTO CURRENCIES ARE ALSO EFFECTIVE

The Fed’s aggressive rate hikes in the face of high inflation hit the SVB and the technology sector hard.

The high debt levels of many companies in the technology sector, especially startups, have left these companies and their ecosystems vulnerable to interest rate hikes.

As companies faced higher borrowing costs, venture capital and other riskier types of investments also became less profitable.

The cryptocurrency crash also negatively affected many technology companies.

Many companies, including the owner of Facebook, Instagram and WhatsApp, Meta, Google’s parent company Alphabet, and tech giants like Amazon, had to shut down.

As high interest rates made it more expensive for many start-ups to raise funds, some SVB clients began withdrawing their money to meet their liquidity needs. This caused the SVB to look for ways to meet withdrawals and sell bonds.

However, the SVB closed its bond position at a loss as continued interest rate rises also negatively affected bonds.

Experts say that the total loss of banks due to losses in the bond market exceeds $600 billion, but that this will not cause a crisis in the banking sector on its own as it did in 2008.

Pointing out that SVB does not have good risk management and a complete client base, experts say they are looking for buyers for the bank.

In the news, citing unnamed sources on the matter, it was reported that the FDIC started the auction process for the SVB on Saturday night.

FEAR THAT IT WILL JUMP TO OTHER BANKS

The bankruptcy of the SVB hit bank stocks last week, including the country’s biggest banks such as Goldman Sachs and Bank of America.

While the bank’s failure went down in history as the “second largest bank failure in the US,” there are concerns that it could spread throughout the industry.

On Friday, US Treasury Secretary Janet Yellen met with officials from financial system regulators to discuss developments surrounding the SVB.

Yellen, in an interview with CBS television on Sunday, stated that they are not in favor of the bailout package for the SVB.

Emphasizing that the situation is very different from the financial crisis almost 15 years ago, which led to bank bailouts to protect the industry, Yellen said: “We will not do this (rescue package) again. But we are concerned about depositors and focused on meeting their needs.” he used his statements.

ONE MORE BANK FAILURE

News of the bankruptcy came from New York-based Signature Bank in the banking sector, which had a busy weekend following the US bankruptcy of SVB.

The New York Department of Financial Services (DFS) reported last night that the FDIC has appointed a trustee for Signature Bank to protect depositors.

With these developments, the US Treasury Department, the Fed and the FDIC issued a joint statement on the SVB and Signature Bank and announced decisions made on deposit protection.

In the statement, which indicated that SVB clients will have access to all their money from today, it was indicated that taxpayers will not bear any loss related to SVB and Signature Bank.

The Fed also announced that additional financing would be provided to eligible depository institutions to help banks meet the needs of all depositors.

Noting that the Bank Term Financing Program (BTFP) will be created for additional financing that will provide loans to depository institutions for up to one year, the Fed stated that the US Treasury Department will provide up to $25 billion. of the Exchange Stabilization Fund to the program.

OTHER COUNTRIES ARE ALSO CONCERNED

The rapid collapse of the SVB in the US has also caused concern in other countries.

The Israeli Prime Minister, Benjamin Netanyahu, announced that they will help Israeli companies in this sector in the face of the crisis created by the bankruptcy of the SVB in the world of high technology.

In his Twitter post, Netanyahu stated that he closely followed the bankruptcy of SVB, which created a deep crisis in the world of high-tech, and held talks with officials of the high-tech sector in Israel.

Noting that they will take steps to prevent the hi-tech sector in Israel from being negatively affected by this crisis, Netanyahu noted that if necessary, in addition to the responsibility of hi-tech companies and their employees in Israel, Israeli companies whose operations are based in Israel will take steps to help them overcome the liquidity crisis caused by this turmoil.

British Prime Minister Rishi Sunak also stated that the British government is trying to find a solution to limit the possible impacts on businesses due to the bankruptcy of SVB and its UK subsidiary.

On the other hand, the International Monetary Fund (IMF) reported that they are closely monitoring developments regarding the SVB and its possible effects on financial stability. The IMF said in a statement that it has full confidence that US policymakers are taking the right steps to address the situation. (AA)