ALB Limited 15.03.2023

The Second Biggest Bank Crisis in America

This year, 3 banks went bankrupt and failed. The biggest, as you know, Silicon Valley Bank $209 billion (assets), along with Signature Bank $110 billion, and Silvergate $11 billion. On March 12, a joint statement was issued by Fed chairman Jerome Powell, American Secretary of Treasury Janet Yellen, and FDIC Chairman Martin Gruenberg. The first sentence in the statement was as follows: They stated that they took decisive decisions in order to protect the American economy and protect the public's trust in the banking system. They have ensured that the banking system will continue to fulfill its vital functions, thereby ensuring continued access to deposits and credit to households and companies. However, shareholders and some unsecured borrowers will not have the security to be given by these institutions. As stated in the statement by these three, as of Monday, March 13, all depositors will be able to receive their payments. These depositors include founders, tech billionaires, and start-ups. It is not uncommon for Americans to wait in line to get the money in their accounts, which was unprecedented even in 2008. At the same time, there is a possibility that the Fed will put an end to the quantitative tightening in the balance sheet of fed process in order to reduce inflation. Because they started to use the resources they wanted to transfer in this direction. On March 12, the Fed also stated that it will provide additional financing. The Treasury, on the other hand, decided to keep an additional $25 billion Exchange Stabilization Fund as backup support, which the Fed thinks it won’t be needed. There is a possibility of ending the reduction in the balance sheet, and even increase of 50 basis points is highly probable since the desired point in inflation was not reached last week, while the current possibilities in the interest rate decision are to be stopped, reduced or only increased by 25 basis points.

The reason for the problem experienced by the SVB was the depreciation of American bonds with the interest rate hikes and the stockpiling of low-interest bonds. It is also a lending bank to SVB Venture Capital companies and startups. With the disruption in the technology sector due to problems such as the pandemic, war, chip crisis, and inflation, there was a recession and companies started to withdraw their deposits. Although they sold securities and shares on Wednesday, March 8, to close the gap between assets and liabilities, eventually it was not enough. Unlike the global financial crisis in 2008, protective stance was not taken by the Fed, the Treasury, and the FDIC. However, the smaller banks in the United States continue to lose value at the rates of 20-30% and 60% every other day. It is unclear whether these banks will receive support.

One of the debates in the financial market is 'moral hazard'. This time it's whether the tech sector is 'too big to fail'. The collapse of the SVB is the biggest since the collapse of Washington Mutual since 2008. With the decisions taken by the government, a crisis like the one in 2008 will be prevented.

It was obvious that the Fed would raise interest rates. It is not right for me to pin the problem to the Fed, the main problem is that the risk management department of the SVB did not work well. The announced US CPI data is %5,5. The next decision will continue with an increase of 25 basis points. Along with providing support for the resolution of this 'unexpected' chaos, as Powell repeats in every speech, achieving price stability and inflation target will continue to be the main target.

Tags: Silicon Valley Bank, Signature Bank, FED

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