The Spillover and Implications of the Silicon Valley Bank Bankruptcy – FT中文网

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Founded in 1983, Silicon Valley Bank is the 16th largest bank in the United States, mainly providing financing for start-ups in the technology industry. It is generally believed that this bank’s investment is relatively conservative, and the risk of its asset portfolio is not high. A large part of its asset portfolio is low-risk bonds. By the end of 2022, Silicon Valley Bank’s total assets will be about US$209 billion, and its total deposits will be about US$175.4 billion. On March 10, the California Department of Financial Protection and Innovation closed Silicon Valley Bank on the grounds of “insufficient liquidity and insolvency” and designated the Federal Deposit Insurance Corporation as the receiver. “One stone stirs up a thousand waves”, this incident has fermented in the United States and even the world.

As for the cause of the incident, public opinion points to two reasons: one is that it was affected by the collapse of FTX, a major customer of the bank, the cryptocurrency exchange last year. Regulatory investigations into FTX unnerved Silicon Valley Bank customers, triggering a run on the bank. Second, in the face of a run on the bank, Silicon Valley Bank was forced to sell $21 billion of high-quality securities, but the value of these securities was greatly depreciated by the impact of the Fed’s strong interest rate hikes. In addition, these securities have not yet expired, and the sale directly brought $1.8 billion loss. Indeed, it demonstrates the trilemma inherent in ongoing monetary policy changes in the U.S., the challenge facing the Fed: to achieve its 2% inflation target while achieving full employment in its dual mandate, while also ensuring The financial system is stable. However, the ensuing rise in bank interest rates has exacerbated the bank’s debt and liquidity difficulties. Here, Silicon Valley Bank failed to adjust its expectations for U.S. bond interest rates in a timely and accurate manner. In just three years, the Fed’s extreme operation from violent interest rate cuts to violent rate hikes has led to a surge in market risks. At present, the fuse of financial market instability is the need to hedge the book losses of bonds caused by rising interest rates, and some technology industries are under pressure. The outside world has always had doubts about the quality of bank loans, and under this mistrust, more and more investors in technology companies are scrambling to transfer funds, and the flight of depositors directly contributed to this crisis. In addition, the structural risks caused by the historical inversion of U.S. bond interest rates have greatly reduced the “fault tolerance rate” of financial institutions, which has led to widespread threats to the U.S. commercial banking system. In this context, it is difficult for the financial system to achieve effective stability. In other words, the underlying reason for this incident is the long-standing abuses of the US government’s policies and the financial industry.

In order to avoid market panic, US Treasury Secretary Janet Yellen held an emergency meeting with important banking regulators on March 10, expressing “full confidence” in the federal agency’s intervention and saying that the US banking system is still resilient. And President Biden’s latest statement also defended the stability of the US banking industry, saying that he would not use taxpayers’ money to save the bank, and would take punitive measures against the top executives of Silicon Valley Bank, while strengthening industry supervision, in an attempt to appease the market Panic. But panic is still spreading.

Unexpectedly, no more than 48 hours after the Silicon Valley Bank’s thunderstorm, the Federal Reserve announced the closure of another bank that had liquidity risks and had cryptocurrency business, Mark Bank. For now, all depositors at the institution will be protected and taxpayers will not bear any losses. In fact, American society is extremely sensitive to bank failures, because historically, banking crises are often seen as the beginning of systemic financial crises. For example, on September 15, 2008, the collapse of Lehman Brothers was seen as a sign that the global financial crisis of 2007–2008 was out of control. When Silicon Valley Bank exploded, most people in the industry believed that this event was different from the 2008 financial crisis and was unlikely to cause a full-scale financial turmoil. Because since 2008, the U.S. banking industry has become more stringently regulated. Although Trump has repeatedly relaxed regulation, the bank firewall has been established. Based on this, Treasury Secretary Yellen confidently stated that the banking system is “very safe, well-capitalized” and “resilient”. Given the lessons of the 2008 financial crisis, Democratic Senator Bob Menendez said on “Meet the Press”: “I’m not going to bail out the banks anyway.” expected.

Currently, the crisis is spreading rapidly. Shares of First Trust Bank of the United States fell the most in the days after the thunderstorm, falling more than 60% in pre-market trading on considerable volume. Charles Schwab and Comerica Bank both fell 8%, KeyCorp fell nearly 6%, while Bank of America fell 3%. Citi fell 2.2% in premarket trading. Even JPMorgan shares are down 1.2% now, with a host of U.S. bank stocks selling off. According to incomplete statistics, the stock prices of more than 10 small and medium-sized banks in the US stock market have hit circuit breakers. In addition, the stock price of Charles Schwab, an asset management giant with a market value of more than 100 billion U.S. dollars, was also dragged down. It once plummeted 22% during the session and hit a circuit breaker. The systemic crisis in the U.S. banking industry has clearly shown a trend of spreading from “point to surface”.

The problems in the US financial industry have persisted for many years, and the US government has always been between the two extremes of strict regulation and liberal speculation. In view of the severe financial crisis in 2008, former Democratic President Barack Obama strengthened financial supervision and implemented new legislation. Since Trump took office, he has weakened the power of regulators such as the Consumer Financial Protection Bureau and loosened or repealed some provisions of the Dodd-Frank Act aimed at strengthening financial supervision. While Biden strengthened the supervision of the traditional financial industry, he vigorously developed encrypted assets and digital currencies. This is a major feature of Biden’s financial policy. The explosion of Silicon Valley Bank is a seemingly accidental event against the background of the US debt crisis, the overall pressure on start-up technology companies, and the lack of supervision of digital assets, but its real motivation comes from US government policies. The focus of the current bipartisan struggle in the United States has returned to regulatory policy, with most Democratic lawmakers praising Biden’s actions to protect the banking system and blaming the rollback of financial regulation under Trump for paving the way for the crisis. Some Republicans have accused U.S. officials and regulators of mismanaging the financial system, keeping borrowing costs too low for too long during the coronavirus pandemic, fueling inflation and forcing the Federal Reserve to raise interest rates so quickly that it hurt some banks. Senator Mike Crapo of Idaho, the Republican leader on the Senate Financial Services Committee, said that “inflation played a key role in the recent bank failures, with rising interest rates and mismanaged interest rate risk leading to a liquidity crisis.” The problems of a series of seemingly “strong” banks are the inevitable result of long-term failure to pay attention to and solve the persistent problems of the US financial market.

The logic of the US financial crisis is similar. The essence of the 2008 financial crisis was a political bubble, which has played a central role in all previous financial crises in the United States. The US financial crisis will not be a purely economic concept, it is still a very important political concept. Nolan McCarty and Keith Poole wrote in the classic book “Political Bubbles” analyzing the domestic economy and politics of the United States that there is a “political bubble” lurking behind every financial crisis in the United States. This kind of market behavior is facilitated by political bubbles; political bubbles originate from a strong community composed of specific beliefs, institutions and special interests, and the risk preference behavior of the financial industry; political bubbles will not stop them, but will promote, promote and Zoom in; political bubbles are the product of rigid ideologies, unresponsive and ineffective government agencies, and special interests.

In fact, as early as March 8, according to the “Wall Street Journal” report, the cryptocurrency bank Silvergate Capital announced that it would cease operations and voluntarily liquidate its subsidiary Silvergate Capital, which provides services to the cryptocurrency industry. Then the crisis spread to the whole industry and expanded to the European region. Due to poor risk control, liquidity crisis and credit crisis emerged. At present, the market does not seem to trust the US Treasury, the Federal Deposit Insurance Corporation, the Federal Reserve, and even Biden’s personal statements. Market panic is spreading, and a series of well-known banks have been recruited, leading to federal government agencies having to intervene.

The U.S. banking and financial industry exploded, and the impact is significant:

First, the Biden administration must face the financial chaos brought about by economic policies. That is, the unlimited quantitative easing policy (increased leverage) implemented by the Biden administration to deal with debt and stimulate the economy, the creation of currency bubbles has brought about systemic turbulence at the financial level, how to achieve financial security and strengthen the supervision of virtual transactions, and Formulating new legislative norms to crack down on financial speculation and illegal activities is a thorny issue that Biden has to face. At present, this kind of systemic normative change is relatively tricky. The Treasury Department under the leadership of the Democratic Party still hopes to prevent market chaos through financial rescue. At present, under the intervention of the Ministry of Finance, the federal government is still implementing the strategy of “tearing down the east to pay for the west”, providing rescue loans with high interest rates of hundreds of billions of dollars. JPMorgan Chase, Bank of America, Citigroup and other banks have injected $10 billion into First Trust Bank of California to maintain its liquidity. The Fed disbursed $160 billion in loans through the discount window and new contingency arrangements in the week ended March 15 to keep funding chains from breaking, but the crisis is still spreading.

Second, the systemic crisis in the US banking industry has not been eliminated. A large number of start-ups in the United States will experience operational difficulties due to difficulties in obtaining financing and new credit or capital being locked up. This will hit a number of start-ups and cause a new wave of unemployment and bankruptcy. After the U.S. cut off Chinese capital’s financial support channels for U.S. startups with the Foreign Investment Risk Review Modernization Act (FIRRMA), under the reality of weak globalization and the gradual decoupling of China and the U.S. in the technology field, U.S. technology start-ups and independent Horn enterprises may face a new “winter”, which will affect the national innovation ability of the United States. The crisis in the banking and financial industry is a reflection of the US government’s governance crisis, which shows that the Biden administration has serious loopholes in financial governance. At present, Biden has threatened to severely punish the top executives of bankrupt banks, but he has not touched the essence of a series of problems, that is, the institutional factors that lead to the proliferation of encrypted virtual currencies and the deregulation of complex financial engineering.

Third, there is the possibility of inducing systemic risks in the U.S. economy and the international financial system. Faced with the infighting among the top political elites in the United States over the debt ceiling, Goldman Sachs said at the end of January this year that a comprehensive debt ceiling crisis could trigger an economic recession. If a string of banks defaulted on payments en masse, Wall Street and ordinary people would be thrown into chaos and could delay payments to Social Security beneficiaries, military members and veterans. Silicon Valley Bank and Logo Bank, as investment banks operating virtual currencies, have a crisis in their reputation, which has induced systemic risks in the US financial sector. The US has the largest number of large banks in the world and can affect other banks through the US dollar channel. Or a “butterfly effect” will be derived, which will promote the transfer of the crisis to the industrial world, and even further transnational transfer through debt relations, pushing new “dominos” to fall.

Fourth, it may lead to a new competition between the two parties in the United States. The special election cycle and political system design in the United States make it difficult for the two parties to conduct in-depth cooperation on deep-seated issues such as ideology, interests, and systems involved in financial regulation, and it is also difficult to systematically reflect on the financial bubbles caused by political bubbles. American political elites often let the bubble continue to expand and indulge in the speculation of short-selling institutions; the public hopes to buy assets with inflated prices and sell them before the bubble bursts; politicians hope that any means of dealing with the crisis will not affect themselves The re-election of the party should not compromise its own election advantages. The cause of the crisis lies in the ideology of the ruling party. For example, the large amount of dollars led by Biden has caused serious currency oversupply and inflation, and the continuous expansion of industrial competition with China and the European Union and the implementation of nearly 100 billion US dollars in subsidies have further increased the Increased fiscal pressure and widened the deficit. The generalization of security has led to a series of issues such as military expansion, which has contributed to the continuous increase of government budgets and created new financial difficulties. U.S. policy has continually oscillated between speculatively tightening financial regulation and deregulating it. The limited terms of the US president and members of Congress have weakened the enthusiasm of the two parties to find long-term solutions. In this way, historical opportunities that turned into crises are constantly being missed. In the face of the crisis, although the federal government has repeatedly emphasized that market risks are reliable, the market has been full of doubts about the political elite’s pledge, and the financial market continues to “squeeze water” spontaneously, including the Silicon Valley parent company’s choice to publicly sell the assets of Silicon Valley Bank. times of elimination. The follow-up results are hard to predict. The bipartisan battle over financial regulatory responsibilities, how to bail out and legislate virtual currencies may only be just beginning.

In fact, each round of financial crisis is eliminating specific banks and entities. In this man-made crisis and conflict, global business has achieved brutal self-evolution.

(Note: Wang Yingliang, Chief Writer of China Development International Affairs (NEIA) Research Workshop, mainly researches industrial investment and national competition, WeChat account porsche910114. This article only represents the author’s personal opinion. Editor’s email [email protected])

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