Silicon Valley Bank: 3 differences between the collapse of this financial institution and the banking crisis of 2008

One of the questions being repeated these days is whether the collapse of the Silicon Valley Bank (SVB) could trigger a financial crisis like the one in 2008.

Nearly 15 years after the “Great Recession,” which began in the US with the “junk mortgage” crisis and spread to the rest of the planet, the memories of that severe economic collapse still linger.

The SVB bank is the largest bank bailed out in the US since the 2008 financial crisis. However, experts who have followed the events of the past few days step by step agree that there are few similarities with what is three happened decades ago.

Not only because the global context is different, but also because of the characteristics of the SVB and the measures taken by the authorities to allay fears and prevent panic on Wall Street.

On Sunday, regulators indeed announced that all savers would be able to withdraw their money from the now closed bank.

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Even US President Joe Biden assured Monday that the country’s financial system is safe and wants to radiate calm avoid a “contamination effect” for the rest of the banking system.

“Their deposits will be there when they are needed,” the president said.

These are some of the major differences between the collapse of the SVB and the 2008 crisis.

1-SVB is not a typical bank

SVB was a bank specialized in the technology sector whose deposits came mainly from start-ups, also known as startups.

The technology sector is going through a tough time and venture capitalists, who often fund these companies, are not interested in riding the rollercoaster while there is so much uncertainty in the global economy.

Uncertainty due to a series of events such as the pandemic, the war in Ukraine and the fastest rise in credit costs since the 1980s.

The current economic scenario is, to put it one way or another, unusual.

According to research firm Oxford Economics, SVB was “exceptionally ill-prepared to survive aggressive rate hikes from the Federal Reserve”.

If the rest of the banks have benefited from the interest rate rise, the SVB has suffered damage by targeting the technology sector.

After making wrong investment decisions that meant losses, the bank did not resist the consequences of the increase in borrowing costs and was left with insufficient funds for its operations, which is known as lack of liquidity.

As soon as customers and investors realized something was wrong, they rushed to withdraw their money.

That panic, which increased within hours, eventually caused the collapse.

Instead, during the 2008 crisis, banks took a nosedive because traded toxic mortgages with a huge pool of clientscreating a systemic problem throughout the banking sector.

“It really should be different this time,” said Rupert Thompson, chief economist at Kingswood, because SVB’s client base is very niche and its business model revolves around venture capital tied to technology.

What caused many banks to fail in 2008 was that they all had too many risky real estate loans.

In the case of the SVB risky loans built up over months did not failInstead, the collapse occurred within hours as customers rushed to withdraw their deposits.

2-So far there are no symptoms of contagion to the rest of the banking sector

In 2008, when the Lehman Brothers bank collapsed in the subprime mortgage crash, the entire international financial system was affected.

Until now, despite the nervousness that hit the stock market after the fall of SVB, the situation has not escalated to widespread contamination Neither in the United States nor in other countries.

The reaction of the US authorities brought the idea of ​​”salvation” back into the debate. And that one word set alarm bells ringing. Many thought that if there is a bailout, it will be because there could be a bigger collapse, as happened in 2008.

But this time the rescue was different. It was a bailout of depositors’ funds, leaving out affected shareholders and VCs.

In that sense, it was not a bailout for the banking system, as happened 15 years ago.

‘SVB is not Lehman and 2023 is not 2008’, wrote Nobel laureate in Economics Paul Krugman. “We’re probably not looking at a systemic financial crisis.”

On this occasion, the rescue of client funds has been financed with the Deposit Guarantee Fund (DIF), which was established for emergencies.

This fund is regularly financed with quarterly payments by the banks themselves and with interest from government bonds.

Regulators also hope that the sale of the SVB’s remaining assets will help fund the return of money to depositors, mainly businesses.

Whether the government bails out a troubled bank remains a controversial political issue the anger sparked by the Wall Street bailout during the 2008 financial crisis.

Silicon Valley Bank: why the US bank collapsed (and what the US Federal Reserve bailing out its clients means)

In any case, unlike in 2008, it is not ordinary people who are affected by the fall of the SVB, nor their homes that are in danger.

During the “Great Recession,” millions of Americans lost their jobs and homes.

While the banking sector faces challenges today, industry analysts say there appears to be no risk of widespread contagion.

3-There are stricter banking rules than in 2008

“Let me make it clear that investors and owners of big banks were bailed out during the financial crisis, and the reforms that have been made mean we won’t be doing that again,” Treasury Secretary Janet Yellen said.

What reforms is Yellen referring to? After the Great Recession of 2008, the US Congress passed the Dodd-Frank law.

Among other things, that law requires banks to undergo “stress tests,” or what-if scenarios, to test their ability to respond in a crisis.

The law also set minimum capital requirements for banks, a kind of buffer of funds to respond to when problems arise.

But in 2018, during the administration of Donald Trump, the law was amended and currently only applies to banks with assets of more than $ 250 billion, not the smallest ones.

That explains why the SVB was not subject to the same rules than the larger banks.

In fact, former SVB CEO Greg Becker was in favor of raising the threshold for larger banks.

Despite the change in law, at least the largest banks remain subject to the conditions that were established after the 2008 crisis.

And it is precisely these banking entities that pose a greater risk to financial stability.

To avoid further surprises, US regulators have created a new loan program so that troubled banks can use some of their financial assets to get a loan from the Federal Reserve.

This program essentially acts as a safety net to ensure that banks can meet the needs of their depositors.