Three takeaways from Silicon Valley Bank collapse
Silicon Valley Bank’s collapse could have resulted in a broader financial crisis, leaving the authorities no choice but to implement emergency measures.
Regulators in the US said on Monday that SVB’s customers would have access to all their deposits, and a new facility has been set up to provide banks with access to emergency funds.
The Fed has also taken action to make it simpler for banks to borrow from the central bank in an emergency.
As I was quoted by City AM, International Investment, Business Insider, African Eye Report, Fintech Magazine, Finbold, Finextra, The Online Citizen and Data Quest, amongst other media, I believe there are three main takeaways from the collapse of Silicon Valley Bank.
Firstly, the authorities are going to come under fire, particularly from the shareholders of SVB investors.
Yet the Federal Reserve, Treasury and regulators were forced to take action to bring an end to the doom loop impacting the banking sector.
Had they not taken action, it would have been a dereliction of duty. If customers hadn’t gained access to their deposits from Monday, it would have led to a loss in confidence in the banking system, resulting in a ‘run on the banks’ which, subsequently, would have triggered a liquidity crisis in the banking and wider financial system. This could have sparked a full-blown financial crisis, and the authorities couldn’t let this happen.
Secondly, the SVB collapse brings the Trump-era deregulation of banks into question. Indeed, the move to roll back Dodd-Frank’s ‘too big to fail’ regulations, decreasing capital requirements and oversight, appears to have played a part in the collapse.
It looks as though the deregulation has permitted banks such as SVB to take reckless risks. As such, a serious conversation now needs to be held about reversing the law to bolster confidence and avoid future collapses.
And thirdly, it is now doubtful that the Federal Reserve will continue with its aggressive rate-hiking stance. The upcoming hike was forecast on 22nd March following strong jobs data over the past two months.
However, the stress in the banking sector, and the impact on confidence, will likely give the Fed cause for pause on its rate-hiking stance.
I’m certain many people will be asking whether SVB was the first high-profile victim of the Fed’s higher rates plans.