Why is the banking system safe despite the SVB: professor

SVB, as it is known, is largest lender in the US to fail since the 2008 global financial crisis – and the second largest ever.

We asked William Chittendenassociate professor of finance at Texas State University, to explain what’s going on and whether Americans should be concerned about the safety of their financial system.

Why did Silicon Valley Bank suddenly collapse?

The short answer is that SVB did not have enough money to pay depositors so the regulators closed the bank.

The higher response started during the pandemic, when SVB and many other banks rake in more deposits than they can lend to borrowers. In 2021, SVB deposits doubled.

But they have to do everything with that money. So, what they can’t lend, they invest in the safest US Treasury securities. The problem is rapid increase in interest rates in 2022 and 2023 causing the value of these securities to fall. A characteristic of bonds and similar securities is that when yields or interest rates rise, prices fall, and vice versa.

the bank recently said it took a US$1.8 billion hit to sell some of those securities and they were unable to raise capital to offset the loss as their stock began to plummet. That prompts prominent venture capital firms to advise the companies they invest in take their business from Silicon Valley Bank. This had a snowball effect that led more and more SVB depositors to withdraw their money as well.

Investment losses, combined with withdrawals, were so great that regulators had no choice but to step in to close the bank to protect depositors.

Are the deposits safe?

From a practical perspective, the FDIC now runs the bank.

It is common for the FDIC to close a bank on a Friday and have the bank reopen the following Monday. In this case, the FDIC has announced that the bank will reopen on March 13 as the Deposit Insurance National Bank of Santa Clara.

By the end of 2022, SVB has $175.4 billion in deposits. It is unclear how much remains in bank deposits and how much is insured and 100% safe.

For depositors with $250,000 or less in cash at SVB, the FDIC said customers will have access to all their money when the bank reopens.

For those with uninsured deposits at SVB — typically anything above the FDIC limit of $250,000 — they may or may not receive the rest of their money. These depositors will be given a FDIC’s “Certificate of Receiver”. for the uninsured amount of their deposits. The FDIC has said so Pay off some of the unsecured deposits next week, with further payments possible as the regulator liquidates SVB’s assets. But if SVB’s investments have to be sold at a huge loss, uninsured depositors may not get any additional compensation.

What was the last US bank to fail?

Before the SVB failure, the most recent bank failure occurred in October 2020, when both At least State Bank in Kansas and First City Bank of Florida taken by the FDIC.

Both of these banks are relatively small – with about $200 million in deposits combined.

SVB is the largest bank to fail since September 2008, when Washington Mutual failed with $307 billion in assets. WaMu fell after the collapse of the investment bank Lehman Brothers, which is about to destroy the global financial system.

In general, US Bank failures are less common. For example, nothing in 2021 and 2022.

Is there a risk that more banks may fail?

By the end of 2022, SVB is the 16th largest bank in the United States with $209 billion in assets.

That sounds like a lot – and it is – but that’s only 0.91% of all banking assets in the US. There is little risk that SVB’s failure will spill over into other banks.

As such, the collapse of SVB highlights the risk that many banks have in their investment portfolios. If interest rates continue to rise, and the The Federal Reserve has indicated that they willthe value of the investment portfolios of banks across the US will continue to decline.

While these losses are only on paper – meaning they are not realized until the assets are sold – they are still increase the bank’s overall risk. How much risk increases varies from bank to bank.

The good news is that most banks today have sufficient capital to absorb these losses – no matter how large – in part due to the efforts made by the Fed after the financial crisis of 2008 to ensure that financial companies can weather any storm.

So rest easy for now, the banking system is fine.

William Chittenden is Associate Professor of Finance, Texas State University.

This article was reprinted from The Conversation under Creative Commons license. Read the original article.

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