The current crisis surrounding the US intermediate level banks, exposes the collateral damage of the rate-raising tool that the Federal Reserve has stepped up in the battle against inflation. But it also exposes the vulnerability of a system of rules that preferred to forget the devastating consequences of the 2008 crisis.
The Silicon Valley Bank, the institution specializing in technological startups of that famous Californian valley which went bankrupt last Friday, was one pillar of the era of cheap money with rates at rates around zero per cent. A time that ended abruptly when inflation fueled by the economic crisis linked to the coronavirus and partly by the Russian war against Ukraine arrived.
At the height of those moments of easy money, When a torrent of money entered the high-tech sector, the SVB, among other entities, even those related to cryptocurrencies, took billions of dollars on deposits and placed them in long-term Treasury bills, a presumably safe niche.
But, when the Fed started raising rates at an unprecedented rate in 40 years to reduce inflation by cooling the economy, bond yields soared and the market value of investments fell as a result. Let’s remember that bond yields and prices move in opposite directions.
That unexpected distortion shook the backbone of the bank until it collapsed. With another consequence linked to the previous one. Contracted credit and large or small companies simply they went to the bank teller to withdraw their savings and with those continue to finance operations.
In less than 24 hours, there was a $42 billion claim on the entity. But there was no money. It’s when those nightmares happen that banks fail.
To some extent what is observed is the drop of a bubble not necessarily speculative, even if there is everything in this labyrinth. He Wall Street Journal hours ago, with forced naivety, he wondered how it was possible that a large bank, 16 years old in the United States, which had bought the safest assets in the world (Treasury bills) could have collapsed in just two days, leaving one of the most dramatic weekends in the country.
In that remark, he emphasized his astonishment that Silicon Bank leapt from a staggering $27 billion in assets in the first quarter of 2020 to $121 billion by the end of the following year, and $209 billion dollars of total assets last December. huge success.
multi-million dollar injection
A central fact in this theorem is that the United States government, to stimulate the economy in crisis due to the epidemic, but also before, had injected into the system more than four trillion dollars (millions of millions).
This flood, which fueled the subsequent inflationary impact, combined with the Donald Trump administration’s decision, typical of its criteria, to relax the rules that had been imposed just after the 2008 crisis, when the century-old Lehman Brothers bank exploded . a collapse that changed America and the world.
The new measures adopted by the Republican have raised from 50 billion dollars to 250 billion the assets necessary as a requirement to qualify as a bank of “systematic importance”. This means that below that number, there are no periodic stress tests, check the financial soundness of the institution.
That is to say, many of the banks in the intermediate sector have been released to creativity, a vice the relaxation of regulations which, to continue with the memory, was markedly in background of the great crisis that brought down Lehman in 2008 at the time of George W. Bush.
Chiefly responsible for producing this shift in surveillance pattern was the CEO of Silicon Valley Bank, Greg Becker, who spent millions of dollars on lobbying firms to convince members of Congress “the low risk profile of our activities and business model” and give the green light that Trump has finally given.
The risk of a domino effect that is now hovering over this drama is linked to similar procedures that a large segment of these entities has taken. The Signature Bank of New York, which specializes in cryptocurrencies, was closed on Sunday. These banks will be absorbed by the big players of the market because this crisis is considerably less than that of 15 years ago.
But it’s still dangerous. It is at such a point that the government has decided to pay off all deposits, including unsecured ones, and thus avoid them a hasty escape
He also ordered a review of the re-regulation of all banks, regardless of size, and persuaded the Fed, not the government, but pure reality, to slow down its high-rate offensive for a while, a strategy which with these results, approaches the notion of zero sum. Or worse.
Mary Ortiz is a seasoned journalist with a passion for world events. As a writer for News Rebeat, she brings a fresh perspective to the latest global happenings and provides in-depth coverage that offers a deeper understanding of the world around us.