The collapse of Silicon Valley Bank (SVB) and Signature Bank, in the US, and the crisis of Credit Suisse, in Switzerland, caused a major panic among investors who fear a repeat of the financial crisis of 2008. On the other hand, Credit Suisse has indicated that it plans to lend $54 billion from the Swiss central bank and buy $3.24 billion of its own debt to provide liquidity and appease investors. On the other hand, the US government announced on March 12 that it would guarantee emergency loans for all deposits of SVB and Signature Bank.
Silicon Valley Bank: 3 Differences Between the Collapse of This Financial Institution and the 2008 Banking Crisis
Among the external factors that have contributed to the US banking crisis is the loosening of bank risk management and supervisory mechanisms, such as the 2010 Dudd-Frank Act, which requires mid-sized and large banks to conduct annual risk tests. In 2018, the Donald Trump administration reduced the frequency and demand for these tests for regional banks, and in 2020, the Federal Deposit Insurance Corporation (FDIC) relaxed bank capital requirements and allowed banks to invest in venture capital funds. In addition, the accelerated increase in the federal interest rate from 2022 has increased the cost of deposits for bank customers.
The Swiss central bank is launching a bailout for Credit Suisse
(…) raising interest rates to control inflation and unemployment also affects financial stability…
Internally, SVB represents an extreme case of bank risk management. SVB focused on venture capital investment funds and technology start-ups, violating the basic principles of portfolio diversification. This bank offered loans to this sector, but at the same time required the financed companies to keep their deposits with SVB. When interest rates began to rise and the stock prices of technology companies fell, these companies began to withdraw their funds to protect themselves and avoid additional borrowing at higher interest rates. Like any bank, SVB has invested its assets in bonds that can be cashed in, while a significant part of its portfolio has been invested in long-term bonds that need to be held until maturity. His bonds with maturities of five years or more gave him returns of no more than 2%, while rates on his deposits rose to more than 4.5%. This situation worsens because Laura Izurieta, the chief risk officer, is resigning in April 2022, SVB does not conduct risk tests previously required by the Dudd-Frank law and the bank did not take preventive measures when the Fed predicted a future increase in interest rates.
In conclusion, changes in monetary policy, such as raising interest rates to control inflation and unemployment, also affect financial stability, as happened in Latin America. Given these conditions, in order to protect small and large investors, it is even more important to strictly control the financial sector by the economic authorities and the banking sector by conducting annual risk tests with new factors, such as global warming, capital risk investments and in bonds of different conditions and maturity. (OR)
Source: Eluniverso
Mario Twitchell is an accomplished author and journalist, known for his insightful and thought-provoking writing on a wide range of topics including general and opinion. He currently works as a writer at 247 news agency, where he has established himself as a respected voice in the industry.
