The collapse of Silicon Valley Bank (SVB) was quick – very quick. The turmoil started on Wednesday 8 March as SVB suffered a US$1.8bn loss on a forced USD$21bn bond liquidation from its available-for-sale bond portfolio; this left a large hole in its balance sheet. The bank then announced an intention to raise US$2.3bn in capital in an attempt to help repair the damage. However, concerns about the bank’s deteriorating capital position resulted in material deposit outflows on Thursday, and SVB’s share price collapsed. Trust in the bank – an essential thing in fractional reserve banking – began to wane and by the close of play on Friday it was all over.
Concerns have already emerged that the demise of SVB could be a lead indicator for another global financial crisis. We don’t think this is the case as the problems at SVB appear to be idiosyncratic although it is fair to say that the recently-revised regulatory framework in the US certainly didn’t help; one obvious contributing factor in the SVB collapse was the increase under the Trump administration of the threshold value of assets of an entity to be classified as a SIFI (Systemically Important Financial Institution) to $250bn, a number which in retrospect was much too high. In the 2010s, the tailoring of the regulatory framework was perceived as a move towards deregulation; perhaps the 2020s will see further tailoring as a readjustment according to the size, diversity and activity of each bank.
SVB: Not a re-run of the Global Financial Crisis (GFC)
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