Panic Grips US Banking Sector Following Closure of Bank of Silicon Valley

The Silicon Valley bank crisis, which was shut down by US authorities on Friday, has unleashed a wave of panic in the banking sector, with markets wondering about the impact of America’s biggest banking failure since the 2008 financial crisis.

The bank is no longer able to meet the huge withdrawals of its money made by its customers, who are particularly active in technology, and its attempts to quickly raise capital have failed.

And the US authorities announced on Friday that they had closed the Silicon Valley Bank, which is close to the technology community, and that it suddenly found itself in a state of insolvency, and the Federal Depository was entrusted with the management of deposits. United States Insurance Corporation (FDIC).

And Treasury Secretary Janet Yellen summoned officials in charge of financial sector regulators Friday to discuss the situation, stressing that she has “full confidence” in the ability of those agencies to “take appropriate action” and that the banking system is “robust.” and resilient.”

The Federal Deposit Insurance Corporation plans on Monday to reopen 17 bank branches in California and Massachusetts and allow customers to withdraw up to $250,000 in the short term, an amount the institution would normally guarantee.

The Fed said the California Financial Protection and Innovation Authority (DFPI) formally took over the bank’s management, citing “insufficient liquidity and insolvency.”

At the end of 2022, the bank had $209 billion in assets and $175.4 billion in deposits.

Though little known to the public, Silicon Valley Bank was the 16th largest US bank by assets.

The closure of SVB, short for Silicon Valley Bank, marks not only the largest bankruptcy since Washington Mutual closed in 2008, but also the second-largest retail bank failure in the United States.

In the markets, a wave of panic began on Thursday after SVB announced that it was seeking to raise capital quickly to deal with a massive withdrawal of its funds by clients, in addition to losing $1.8 billion from the sale of securities.

The announcement surprised investors and revived fears about the strength of the banking sector as a whole, especially given the rapid rise in interest rates, which led to a decrease in the value of bonds in their portfolios.

The four largest US banks lost $52 billion on the stock exchanges on Thursday, followed by Asian and then European banks.

In Paris, Societe Generale lost 4.49%, BNP Paribas 3.82% and Credit Agricole 2.48%. In Europe, the German Deutsche Bank lost 7.35%, the British Barclays – 4.09%, and the Swiss UBS – 4.53%.

On Wall Street, shares of big banks rebounded on Friday after falling the day before. Shares of JP Morgan Chase rose 2.3 percent in mid-trade, while Bank of America and Citigroup moved closer to balance.

On the other hand, there were more strikes at local banks like First Republic and Signature Bank and their shares fell 23% each.

In a note, Christian Parisot of brokerage group Oriel BGC confirmed that investors “also saw the bank’s difficulties as an inversion of the interest rate curve,” that is, when short-term rates are higher than long-term ones.

Banks usually borrow at short-term rates in order to offer loans at medium or long-term rates.

Another American group is facing problems. Cryptocurrency parent company Silvergate Bank announced on Wednesday that it was liquidating the institution.

Stephen Innes, an analyst at SBI Management, said in a note that he wanted to make sure that the possibility of “capital or liquidity incidents between the big banks” is “minimum.”

After the financial crisis of 2008-2009 and the bankruptcy of the American bank Lehman Brothers, banks have to provide reliable guarantees of the authority to control the national and European markets.

The European Banking Authority is subjecting fifty major banks on the continent to solvency tests.

The results of the last such review at the end of July 2021 showed that financial institutions are able to withstand a major economic crisis without serious damage.

According to analysts at Morgan Stanley, “the funding pressure facing SVB is very specific and should not be taken as the norm for other domestic banks.”

“We do not believe that the banking sector is facing a liquidity shortage,” they added in a note.

Source: AFP.

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