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The collapse of Silicon Valley Bank and Silvergate Bank caused if not panic, then some concern about the implications among investors. The result was a substantial decrease in the major US stock indices, with the S&P 500 falling 4.8%, NASDAQ Composite losing over 5%, and Russell 2000 losing 8.0%.
With the risk of a domino effect, other financial institutions, including PacWest Bancorp, First Republic Bank, Western Alliance Bancorporation, and Signature Bank, also came under pressure. In the case of Europe, the main blow fell on Unicredit, Credit Suisse, and Deutsche Bank.
Who is to blame?
There are three main causes, or better, culprits put behind the current events: the Fed with its “ultra-hawkish” agenda that sank Treasury bond prices, the irresponsible management of Silicon Valley that practically forgot about diversification, and the panicked depositors who began to withdraw their money.
As for Silicon Valley, the root of the problem was that most of the bank’s clients were tech start-ups that hold the promise of becoming the next generation of US Big Tech companies but never delivered on. Partially, due to rising interest rates, inflationary conditions, and a weakening economic picture.
The second part of the problem was that the bank invested the major part of its funds in Treasury bonds and government-sponsored agency mortgage bonds. With Fed turning extra-hawkish, the value of securities began to decline, resulting in substantial losses. Thus, the bank was forced to sell assets, causing panic among depositors and investors…
Talking about perspectives, most analysts do not expect a collapse of the US financial system, nor a repetition of the 2008 crisis. In the worst-case scenario, the contagion effect could eventually generate a liquidity crisis that could later turn into a solvency crisis. The probability of the latter, however, remains low.
And besides, the Fed and the U.S. Treasury Department have already launched a $25 billion Bank Term Funding Program to prevent a much larger crisis. They also assured that depositors will have access to “all of their money” starting this Monday. As for banks’ investors, Joe Biden said this Monday they will not be protected.
