Notwithstanding the President’s promises, the bankruptcy of SVB causes fear on Wall Street

March 13, 2023 Kelley Stuart

Notwithstanding the President's promises, the bankruptcy of SVB causes fear on Wall Street

Due to concerns over what would be the next institution to fail in the wake of the second- and third-largest bank failures in American history, bank stocks slumped on Monday. But, a large portion of the rest of the market increased on hopes that the bloodshed would persuade the Federal Reserve to ease up on its economy-rattling interest rate increases.

Despite the Biden administration’s emergency measures to preserve consumer accounts, Wall Street’s faith in regional banks remained fragile on Monday.

Trade was suspended at a few local banks.

Regional banks have assets between $10 billion and $100 billion, making them larger than community banks but smaller than national banks. While a regional bank can have branches in several states and has a history in each community, some local banks are only able to serve one particular community.

SVB focused in offering banking services to the biotechnology. SVB witnessed a considerable growth in deposits (+86% in 2021) during the pandemic, as California’s tech sector experienced a boom, and heavily invested in Treasury bonds and mortgage-backed securities.

SVB was exposed to interest rate increases in two ways because of its business model:

First, its IT customer base has been particularly badly hurt by increasing borrowing rates. A decrease in venture capital funding and an increase in cash burn among tech companies were the results. As a result, assets belonging to SVB clients were lost in 2022.

Should we demand for immediate rate reductions

Is it time for the Fed to cut the rates rather than the continual rise we observed in the last quarter. By slowing the economy, higher interest rates can reduce inflation, but they also increase the likelihood of a future recession. They also affected the pricing of bonds and stocks that were already in investors’ portfolios.

Because Government bonds are among the safest investments on the planet, banks frequently lodge their capital in them, which has damaged their investment portfolios.

International Banking Reverberations

The California bank’s British subsidiary, Silicon Valley Bank UK Ltd., was sold in London by the government for the nominal price of one British pound.

All Silicon Valley Bank customers will be safeguarded and have access to their money, according to statements made on Sunday by the U.S. Treasury Department, Federal Reserve, and Federal Deposit Insurance Corp. Additionally, the three institutions announced steps to safeguard the bank’s clients and stop further bank robberies.

After the fall many banks in 2008 regulators shut down Silicon Valley Bank on Friday as investors withdrew billions of dollars from the institution in hours. The third-largest bank failure in American history.

Source: CBS

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Kelley Stuart

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