With assets of over $200 billion, SVB has been the beneficiary of processes in the US financial market in recent years, and now it is their own victim. In his native California, he was almost the leading bank in Silicon Valley. In the context of a generous issuance policy on the part of the Fed, when hundreds of billions of dollars were poured into the economy to stimulate the economy, these billions ended up on the stock market, inflating the “bubble of IT companies as the fastest growing. . SVB has invested massively there, tripling their capital in two years, and in start-ups, mostly medical. Startups are a good thing. But “pulls”, as a rule, one in 20. SVB has also invested heavily in the “cryptoeconomics”. He was, in particular, linked to the recently bankrupt crypto exchange FTX.
Since the spring of 2021, the Fed, concerned about high inflation, has begun to vigorously raise the discount rate (from 0.25% to 4.5% currently) and reduce the “quantitative easing” program (c i.e. injecting money into the economy). The Fed withdraws $95 billion from the market each month, compressing the money supply. The “collapse” of the computer bubble has begun. The financial markets are going through difficult times: it has been confirmed that “trees do not grow to the sky”, and when the price of shares is ten times higher than the annual turnover of the campaign, it is not normal. Similar processes have started in the “crypto pyramid”: since March 2021, when the Fed started raising the rate, bitcoin has fallen by more than 65%. SVB began to “transfer” tens of billions of dollars in treasury bills.
This is where the main “ambush” was: against a backdrop of rising FRS rates, it became unprofitable to hold low-yielding bonds. Additionally, rising interest rates have caused the IPO market to crash for many startups and made it more expensive to borrow capital. Customers started withdrawing money from SVB. In an attempt to raise capital to offset deposit flight, the bank lost $1.8 billion in an emergency sale of falling Treasury bonds. And the “raid” of depositors that occurred on the basis of rumors of panic put an end to the bank. It turned out that he was not ready for the fact that the era of “free money” was ending and the era of “expensive money” was beginning. Is the US financial system as a whole ready?
The Fed, along with Treasury Secretary Janette Yellen, are now engaged in psychotherapy sessions: They say everything is under control, and the story of 2008, when Bear Stearns first collapsed due to a mortgage market crash, then Lehman Brothers, after which “it started”, – will not be repeated.
The situation, on the one hand, differs from 2008. The legislation has since been tightened, the banks are better capitalized. Stricter requirements for their own capital have been introduced. On the other hand, the history of SVB showed that there could be hidden risks in the banking system (its collapse was a complete surprise; in December, the investment bank JPMorgan “in the blue eye “recommended to his clients to buy SVB shares, which had fallen a little at that time) against the backdrop of an increase in the value of money. The collapse of the SVB was strongly reacted by the ratings of medium regional banks in America (this is the “circulatory system”, including for medium and small companies), which fell last week by 15-20% per day. In total, US banks lost about $100 billion. Another 50 billion – European banks (on a general panic). It also turned out that about 90% of SVB’s deposits are uninsured, including the private companies that held money there. They can lose them and go bankrupt.
The Federal Deposit Insurance System (FDIC) insures deposits up to $250,000 (depositors receive the remainder from the sale of assets from a failed bank), this amount includes retirement savings, trusts and certain other accounts. But annuities, life insurance programs, stocks and bonds in brokerage accounts and a few others are not covered. Now customers of other banks can start rushing in panic, causing a chain reaction. Businesses with large deposits could come under pressure as outflows increase at all FDIC-insured banks.
Commercial real estate is also vulnerable: lending on it will already require refinancing at higher interest rates. According to Goldman Sachs, there are more than $140 billion worth of commercial mortgage-backed floating rate securities maturing over the next two years in the market. There have already been several major flaws in commercial real estate this year.
Most likely, the Fed will resort to proven methods of “handling”. This could reduce reserve requirements, provide banks with additional liquidity, reduce collateral requirements, or even temporarily suspend the liquidity squeeze program, putting the fight against inflation on hold. Finally, he can declare that he will not increase the interest rate for the time being. But these are all palliatives.
Recently, Nouriel Roubini, an American economist known for his dire (often coming true) forecasts, warned that a world facing high inflation and beginning to fight it with rising interest rates could be hit by a “storm financially perfect”. He predicts a “stagflationary debt crisis” for the global economy (stagflation occurs when the economy contracts even though prices continue to rise). Which could turn out to be worse than what the world economy experienced in the 1970s and early 1980s, combined with the global financial crisis. Knowing that in the 1970s, the debt/GDP ratio in developed countries was “only” around 100%, whereas today it reaches 420% of GDP, if we take into account private debts and public. According to his forecast, continuing to maintain high interest rates in an effort to control inflation could cause a “domino effect” in the form of a recession and defaults. Because not only trees do not grow in the sky, but also loans and volumes of “helicopter money” falling from the sky, so to speak, “for free”.
