![]() ![]() To counter the risk, the Federal Reserve has unveiled a new program that allows banks to borrow funds backed by government securities to meet demands from deposit customers. That went on to spark the global financial crisis. While Moshirian says he doesn’t think the banking system is about to unravel, he notes that people also initially felt that the sub-prime mortgage crisis was contained. The longer term questions is whether SVB’s vulnerability to rising interest rates is paralleled in other banks through an over-exposure to falling bond prices. Governments and regulators around the world, including in the UK and Australia, are checking for SVB exposure in their corporate and banking sectors. “In terms of stability, they’ve avoided supply chain consequences,” says Moshirian. There had been concerns that if that guarantee wasn’t implemented, SVB account holders would not have been able to pay employees, sending ripples through the economy. ![]() Immediate concerns of widespread contagion have been contained by the US government’s quick response in guaranteeing all deposits of the banks customers.įinancial futures, which allow investors to speculate on future price movements, rallied for the US technology sector in response to the guarantees. Two days after it announced it would raise capital, the US$200bn company collapsed, marking the largest bank failure in the US since the global financial crisis. Unlike a retail bank that caters for business and households, SVB’s clients tended to have much larger accounts. “Suddenly everyone became alarmed that the bank was short of capital,” says Fariborz Moshirian, professor at UNSW and director of the Institute of Global Finance.Ĭustomers were now aware of the deep financial problems at SVB, and started withdrawing money en masse. It told investors it needed to plug a hole caused by the sale of its loss-making bond portfolio. While SVB’s problems stem from its earlier investment decisions, the run was triggered on 8 March, when it announced a $1.75bn capital raising. Given banks only keep a portion of their assets as cash, they are susceptible to a rush of demand from customers. It took just 48 hours between the time it disclosed that it had sold the assets and its collapse. SVB didn’t have enough cash on hand, and so it started selling some of its bonds at steep losses, spooking investors and customers. However, as economic conditions soured over the last year, with tech companies particularly affected, many of the bank’s customers started drawing on their deposits. If SVB were able to hold those bonds for a number of years until they mature, then it would receive its capital back. So when the Federal Reserve started to hike rates rapidly to combat inflation, SVB’s bond portfolio started to lose significant value. These were, for all intents and purposes, as safe as houses.īut bonds have an inverse relationship with interest rates when rates rise, bond prices fall. The seeds of its demise were sown when it invested heavily in long-dated US government bonds, including those backed by mortgages. The bank invested a large portion of the deposits, as banks do. Many tech companies used SVB to hold the cash they used for payroll and other business expenses, leading to an influx of deposits. The initial market shock of Covid-19 in early 2020 quickly gave way to a golden period for startups and established tech companies, as consumers spent big on gadgets and digital services. As the preferred bank for the tech sector, SVB’s services were in hot demand throughout the pandemic years. ![]()
0 Comments
Leave a Reply. |
AuthorWrite something about yourself. No need to be fancy, just an overview. ArchivesCategories |