From ‘Slow Motion Crisis’ to Charles Schwab… Unfinished SVB financial anxiety

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Although unrest in the global financial sector triggered by the bankruptcy of Silicon Valley Bank (SVB) in the United States has calmed down somewhat, warnings continue to emerge that the crisis in the market still remains. In the banking sector, the ‘slow-motion crisis theory’ comes out, and the risk of a ‘phone bank run’ is also raised. There are also concerns that Charles Schwab, the largest securities firm in the US with total assets of $7 trillion, has also increased its risk factors due to the decline in the value of its bonds following a sharp rise in interest rates.

On the 29th (local time), the Wall Street Journal (WSJ) predicted that a “slow-motion crisis” that gnaws at the system over a long period of time could come through an article titled “The financial sector must prepare for a slow-motion banking crisis.”

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The SVB bankruptcy affected relatively few institutions, but many banks could shrink or be taken over in the future, which would hurt credit supply.

The WSJ predicted that “the global banking crisis over the past few decades has unfolded over several years,” and predicted that small US banks could be in crisis.

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The WSJ noted that the current situation is similar to the bankruptcy of the savings and loan association (S&L) in the United States in the 1980s, which began when the Fed sharply raised interest rates to respond to inflation. The Fed started raising interest rates rapidly from last year, which was at the level of zero, and the value of government bonds held by the SVB plummeted, resulting in huge losses.

In addition, with the rapid increase in mobile banking users, the speed of deposit and withdrawal has also increased. The percentage of customers using internet and mobile banking in the United States soared from 52% in 2017 to 66% in 2021. In other words, the risk of a so-called ‘phone bank run’ has increased.

In fact, in the two days immediately preceding SVB’s bankruptcy, customers attempted to withdraw a larger-than-expected $142 billion in deposits. This is equivalent to 81% of the $175 billion in deposits held by SVB as of the end of last year.

In the midst of this, there are concerns that Charles Schwab, the largest brokerage firm in the US, may face a liquidity crisis.

Charles Schwab is facing a crisis, including a drop in the value of his bond holdings due to the Fed’s rapid rate hike. Earlier, Charles Schwab invested heavily in long-term bonds at the time of 2020-2021. The fact that customers’ money is flowing into bank accounts due to interest rate hikes is also the basis for the Charles Schwab crisis outlook.

Charles Schwab’s total assets amount to about $7 trillion. Considering that SVB’s total assets were only $209 billion, the impact of Charles Schwab’s liquidity crisis is likely to be significant.

US President Joe Biden is also showing a cautious appearance, saying that the situation is stabilizing, but the situation is not over yet.

President Biden visited Durham, North Carolina, for a visit to a semiconductor manufacturer the day before, and before heading to the White House, regarding the banking crisis, “We did what we had to do administratively. “I’m sure things are stabilizing,” he said. “I think the market is responding.”

Then, when asked if the administration’s measures against the banking sector’s confusion were all over, the reporters answered, “No. “It’s not over yet,” he said. “We are watching (the situation) very closely.”

In addition, President Biden added that although it may be difficult because Congress is divided, legislative changes to respond to the banking crisis are also being considered.

The very next day, news came that the Biden administration was preparing to apply new rules for medium-sized banks.

Details of the new rule have not yet been clarified, but according to inside sources, the Biden administration received the consent of Congress and the Federal Reserve during the Donald Trump administration to lift the ban on banks with assets of $100 to $250 billion. It is expected that the existing regulations will be re-established.

Changes are expected to include imposing higher capital requirements, establishing a crisis response process, and implementing regular stress tests by regulators to assess financial strength.

Source: Donga

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