US Stunned By The Rapid Collapse of Silicon Valley Bank

The rapid unwinding of SVB Financial Group has blindsided the banking sector after years of stability. The collapse last week, which can be termed the largest bank failure ever since 2008, had a unique set of circumstances but also raised questions when it came to hidden weaknesses that could have consequences for employees as well as customers and also potentially highlight challenges faced by other banks.

The scenario with SCB can go on to lead to tougher regulations, faith, as well as investor skepticism as far as the financial health of smaller banks is concerned that were seen as aptly capitalized after regulators pushed banks to hold more capital after what had happened during the 2008 crisis.

Federal Deposit Insurance Corporation chief, Sheila Blair, said in an interview that the bank watchdogs are more likely to turn their attention to other banks that may have had high amounts of uninsured deposits as well as unrealized losses, two of the major causes that assisted in the quick collapse of SVB.

Blair added that these banks, which have a large amount of institutionally uninsured money, are going to have hot money that runs when there is a sign of trouble.

A sequence of events went on to lead to SVB’s failure, which included selling US treasuries to lock in the funding costs because of expectations of higher rates, which resulted in a loss of $1.8 billion. SVB, known as Silicon Valley Bank, had 89% of the $175 billion in deposits that were uninsured in 2022. It is well to be noted that the FDIC insures deposits up to $250,000.

Investors as well as customers now experience a nervous wait to see if SVB at all finds a buyer as quickly as possible. Apparently, when it came to the 2008 crisis, Washington Mutual did find a buyer immediately, whereas IndyMac took eight months in 2009.

The speed of the SVB crash has indeed blindsided observers as well as even stunned markets, wiping out more than $100 billion in market value for US banks in just a matter of two days.

One of the financial risk consultants, Mayra Rodriguez Valladares, opines that banks happen to be opaque, and everyone wonders how interconnected this bank is to another one, and apparently investors or even depositors don’t want to be the last ones to turn out the lights in the room, so they have to leave.

Experts believe that any ripple effect on the rest of the banking sector may very well be limited. Bigger institutions often have more diverse portfolios as well as larger deposit clienteles than SVB does. It is well to be noted that SVB had a lot of customers from the startup sector.

They did not believe of any contagion risk for the remaining banking sector, says New Constructs, an investment research firm’s CEO, David Trainer. The deposit base of the major banks happens to be much more diversified than SVB, and they are indeed in good health.

The chief investment officer from Albion Financial Group, Jason Ware, said that the linkages from the overall banking systems happen to be limited; however, this situation may have implications when it comes to select regional banks that have direct exposure.

As per other experts, the SVB’s failure may lead to a bolstering of efforts by US regulators when it comes to tightening rules.

Notably, during President Donald Trump’s regime, banking rules were significantly eased post the tougher rules that were put in place after the 2008 collapse. The easier rules when it comes to regional banks are going to come under immense scrutiny as watchdogs look to make sure that they have enough cushion to weather stresses as similar as this. One of the prominent bank critics, Senator Elizabeth Warren, said that the failure of the banks highlights the need for robust rules so as to protect the financial system. One of the areas of particular focus could be the bigger regional banks that received more relief during the Trump administration. US regulators in October last year were thinking about new requirements for large regional banks that would include holding long-term debt more so as to keep the losses in check.

According to Greg Hertrich, US Depository Strategies Head at Nomura, it feels like the first place the market is going to look is towards regional banks that do not have any loan diversification.

Another one that could garner more attention would be expanding which banks are required to account for the market value pertaining to held securities. This particular requirement as of now only applies to banks with more than $250 billion in assets, but it could also grow to include other firms as well.

The chairman of the FDIC, Martin Gruenberg, went on to warn the bankers that firms are indeed facing pretty high levels of unrealized losses since the rapid interest rates have driven down the value of longer-term securities.

Unrealised losses have gone on to weaken banks’ future ability so as to meet the liquidity needs that are unexpected.