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$465 Billion Dollars lost in Global Financial Stocks in 2 Sessions. How worried should you Be?
Global investors are looking to cut exposure to financial based lenders resulting in financial stocks loosing $465 billion dollars in 2 sessions. The recent crisis at Silicon Valley Bank (SVB) has raised concerns about the stability of the global banking system. However, unlike the global financial crisis of 2008, the fallout from the SVB crisis is not expected to have a systemic impact on the global economy.
One of the key differences between the SVB crisis and the 2008 crisis is the approach taken by regulators. During the 2008 crisis, the focus was on rescuing the bond and stock holders of troubled banks. In contrast, the FED has made it clear that bond and equity holders will not be protected and no taxpayer money will be used to rescue the banks themselves. Instead, the focus is on restoring confidence among depositors and preventing a run-on banks. This is absolutely the correct approach to take
To this end, the US authorities have created a facility that will allow all depositors of SVB to access their accounts and withdraw any amount. They have also talked about creating a fund to backstop deposits of other banks that could be caught up in the crisis. This approach should restore confidence among depositors and prevent a domino effect of other banks failing.
However, in practice, restoring confidence has proved to be more difficult than expected. After the SVB crisis, the New York-based Signature Bank failed and shares of California-based First Republic started to freefall. Analysts worry that other smaller regional banks could also get caught up in the collapse.
To prevent the crisis from triggering a global chain of failures, countries around the world have started taking major steps. In the UK, for example, the small SVB operations in the country were taken over by HSBC for the grand sum of £1. Germany has announced a moratorium on SVB branches in that country. Governments and regulators worldwide are scrambling to see what exposure banks and other institutions in their countries have to SVB.
While the SVB failure inevitably draws comparisons with the 2008 crisis, the two crises are actually quite different. In 2008, the assets were down right poisonous – sub-prime mortgage-backed securities, collateralised debt obligations (CDOs) and credit default swaps (CDS). The biggest banks of the entire western world were linked in the mess.
In contrast, the SVB crisis has been caused by a liquidity crunch in the tech sector. During the years of cheap money following the COVID pandemic, SVB's clients flooded it with deposits. However, there weren't enough borrowers, so SVB loaded up on long-term, low-interest treasury bonds instead. While this seemed safe enough on the surface, SVB's deposit and loan base was highly concentrated in Silicon Valley and, more recently, the Napa Valley wineries.
When the Federal Reserve tried to aggressively cool inflation by raising interest rates sharply, SVB faced a sudden loss of faith from its biggest clients in Silicon Valley. The bank was forced to sell a large amount of bonds at a loss of over a billion dollars and announced that it was selling fresh shares to raise capital. This led to a sudden demand of over $42 billion in deposits in a single day, leading to its collapse.
Despite the differences between the SVB crisis and the 2008 crisis, there are concerns that the failure of SVB and other smaller regional banks could have a ripple effect on the global economy. Regulators have acted quickly to restore confidence prevent the crisis from spreading further. Time will tell if these measures inspire investor confidence.
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