Last week there was an earthquake with many implications in the world of American finance. It is Silicon Valley Bank (SVB) that was closed on Friday, March 10, by the American authorities. Little known to the general public, SVB specialized in financing start-ups, becoming the 16th American bank in terms of its assets. At the end of last year it had assets worth $209 billion and deposits worth about $175.4 billion. What happened on Friday is considered by experts in the field to be the biggest bank failure in the United States since the financial crisis of 2008. This failure has shaken financial markets terribly, say French media correspondents in the United States, even as local experts try to calm down the situation at the moment.
How did this bank fail?
Silicon Valley Bank is a bank whose clients were mainly tech players. “These businesses were doing well, they had a lot of cash that they deposited in the bank, and SVB used that money to purchase US Treasury bills,” explains Philippe Waechter, director of economic research at the French banking group Ostrum Asset Managemet. However, a few weeks ago, the “tech” sector began to face some difficulties. The companies then wanted to recover part of the money, and the bank was forced to sell part of the accumulated portfolio. The surprise was the rise in interest rates, which led to the accumulation of losses. The bank could no longer cope with massive customer withdrawals, and they were no longer able to get money. According to Philippe Waechter, the problem of trust in this bank has arisen. Thus, a kind of banking panic was triggered.
Consequences
The first signs of panic appeared as early as last Thursday, when SVB announced that it was looking for capital to deal with the massive withdrawals requested by customers, but without success. Outside the Santa Clara, Calif., headquarters of SVB, nervous customers were wondering Friday how they would be able to access their deposits. An announcement stated that from Monday it will be possible to withdraw up to 250,000 dollars. However, it is too little, considering that the largest companies have very large deposits at SVB. The announcement surprised investors and caused fears about the soundness of the banking sector as a whole, especially as a result of the rapid increase in interest rates that increased the cost of credit. Four largest American banks lost 52 billion dollars on the Stock Exchange on Thursday, followed by European and Asian banks. In Paris, Societé Générale lost 4.49%, BNP Paribas 3.82% and Crédit Agricole 2.48%. Deutsche Bank also lost 7.35%; Britannique Barclays 4.09% and Suisse UBS 4.53%. Instead, on Friday, on Wall Street, the big banks settled down after the confusion of the day before. JP Morgan Chase rose 2.54% and Bank of America and Citigroup lost less than 1%. Larger losses were recorded by medium-sized banks.
The American authorities, underlines the analyst Philippe Waechter, reacted very quickly compared to the great financial crisis of 2008… They engaged efforts to give guarantees to the American taxpayers. Their objective is to show that this situation at SVB is isolated and that the US Federal Deposit Insurance Corporation (FDIC) will manage this bank until things return to normal.
According to analysts from Morgan Stanley, quoted by France Presse, the funding pressures faced by SVP are “completely particular”… The other banks are not facing a shortage of liquidity. However, every time a bank is in trouble there is a fear of contamination, which analysts at Morgan Stanley say is not the case at the moment as it is a Silicon Valley bank that finances start-ups in the technical field. SVB has a limited number of clients and a limited scope of intervention that does not allow the contamination of the classic clientele… respectively private individuals, clients of other businesses. It is, therefore, about something “very localized”.