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One year after the second largest bank failure in the US, vulnerability persists

One year after the second largest bank failure in the US, vulnerability persists

One year after the collapse of Silicon Valley Bank (SVB)which was the second largest bank failure in the history of USA, Vulnerability persists in the regional banking sector, which is very sensitive to the trajectory of interest rates, and another entity of this type is now in trouble.

SVB, the sixteenth largest bank by assets in the US, which had a poorly diversified and highly interconnected customer base, suffered a dizzying bank flight that forced regulators to intervene and close the entity to limit the damage, but panic came. to take over another bank, Signature Bank.

The SVB’s downward spiral began on March 8, 2023, when it disclosed that it had sold bonds at a loss and had a hole of US$ 2.25 billion in its balance sheet: hysteria spread among its clients, linked to venture capital and the technology market. , who ran to withdraw their money.

US regulators guaranteed SVB and Signature deposits beyond the standard limit of US$250,000 per client to reassure the markets and allow the affected companies to continue operating, which for many was understood as a bailout.

SVB was followed by the bankruptcy of First Republic Bank, which was intervened in time and sold most of it to the giant JPMorgan Chase at a bargain price. The First Citizens entity took over SVB and New York Community Bancorp (NYCB) bought Signature, apparently closing a crisis that today it seems cannot be closed.

A report from the International Monetary Fund (IMF) published this Tuesday on the “aftermath” of the crisis indicates that “vulnerabilities in the US banking sector persist” despite the general recovery of the regional ones (small and medium) and points to the policy of the Federal Reserve (Fed) and the expectations around it.

The SVB collapse exposed these banks’ lack of preparation for the high interest rate environment resulting from the Fed’s action, which increased rates by 525 basis points between March 2022 and September 2023 due to persistent inflation, giving rise to the fastest monetary tightening cycle since the 1980s.

NYCB, another bank in trouble

In a recent note, Goldman Sachs analysts recalled that SVB’s fall occurred amid fears of a “crash landing” of the economy due to Fed policy and targeted small and medium-sized lenders, which are highly exposed to the commercial real estate market.

The IMF, for its part, points to changes in expectations regarding interest rate cuts in the US and “substantial losses announced by a large regional bank highly exposed to the commercial real estate sector,” in reference to NYCB, whose problems have brought the shadow of another crisis.

That institution’s biggest concern is banks with high levels of unrealized losses – losses due to the fall in value of an asset that has not yet been sold – resulting “from the recent rise in interest rates”, and those with “potential liquidity pressures” linked to uninsured deposits.

NYCB has lost about 70% of its capitalization since the end of January, when it disclosed poor quarterly results linked to the real estate market and “material weaknesses” in its loan control, which has led to several downgrades in its credit quality by Moody’s and Fitch.

This Wednesday was a day of great volatility for NYCB, which collapsed on the stock market when it was reported that it was seeking liquidity, but then soared after announcing an injection of US$ 1,000 million from several investment firms and a change in its management team, including to two well-known former Treasury officials.

On the other hand, important figures in the financial sector have highlighted the role of new technologies in the crisis, since the speed enabled by new digital tools became a double-edged sword in the massive withdrawal of money, as the CEO said. of the UBS bank, Sergio Ermotti, at the Davos forum.

This past January, a regulatory entity dependent on the Treasury, the Foreign Exchange Auditor, advocated for a new bank liquidity requirement to prevent a repeat of the SVB’s financial panic situations and alluded to the new “speed” in payments to claim some “better brakes” in the system.

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Source: Gestion

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