From Silicon Valley to Signature, what's behind the US banking meltdown

The turmoil in the financial sector of the world's biggest economy has raised fears of a rerun of the 2008 global crisis.

A branch of Signature Bank is photographed, late Sunday, March 12, 2023, in New York.
AP

A branch of Signature Bank is photographed, late Sunday, March 12, 2023, in New York.

The US banking system was hit with a shock wave after the state’s financial regulator announced the closure of two top financial institutions - the Silicon Valley Bank and Signature Bank.

The Federal Deposit Insurance Corporation’s decision for SVB on Friday came after reports suggested that the bank’s parent company, SVB Financial Group, was looking for a possible sale.

According to official numbers, SVB had around $209 billion in total assets and about $175 billion in total deposits at the end of 2022.

On Sunday, Signature Bank, the second biggest lender in the cryptocurrency industry, also was closed.

New York state’s Department of Financial Services announced FDIC had taken possession of the sinking bank, which lost nearly $ 200 billion in assets and deposits within a few months.

Following SVB’s crisis, spooked investors wiped out over $100 billion in market value from US banks.

What went wrong

The closure of the SVB — the 16th-largest but crucial financial institution for start-ups — is recorded as the worst in US financial history after Washington Mutual, the largest savings and loan association that collapsed in the 2008 global economic crisis.

The bank’s financial health situation had deteriorated in the past couple of years as the world was hit by the global pandemic of coronavirus and an emerging chip shortage that targeted the tech industry.

The bank’s several executives reportedly exchanged messages last Thursday about whether they should continue to hold their cash in the bank.

The company on March 8 sought to raise $2.5 billion to plug a hole in its balance sheet but failed.

SVB sold about $20 billion of securities that got the attention of investors on vulnerabilities in its balance sheet. 

The frantic news led them to erase about $10 billion of the shares in the stock market. Then, on Friday morning, the bank went bust after customers initiated withdrawals of about $42 billion in one day. The bank’s cash fully dried up, resulting in a “negative cash balance” of nearly $1bn. 

Signature Bank was caught in the same nightmarish situation. It is the second crypto investment bank that left companies to transfer dollars in real time.

But it is not the first in its kind of bank that collapsed. 

Last Wednesday, Silvergate, another crypto-focused company, announced its intention to wind down its operations and liquidate the bank as the previous year’s forex market crash continued reverberating through the industry.

Authorities in New York said the FDIC will handle the Signature Bank’s affairs “in order to protect depositors.”

First Republic Bank, another troubled bank, has also announced that it had fortified its financial situation with backup from Federal Reserve (Fed) and JPMorgan Chase.

US aims to stop a domino effect

Back-to-back takeovers and collapse announcements from the banks have increased activities in the corridors of Washington.

Financial arms of the US government stepped in to prevent any domino effect that would make other companies declare failure. Those efforts failed on Sunday.

President Joe Biden ordered Treasury Secretary Janet Yellen and National Economic Council Director Brian Deese on Monday to work with banking regulators to address problems at Silicon Valley Bank and Signature Bank.

In a tweet, Biden said he aimed to protect “workers, small businesses, taxpayers, and our financial system.”

Separately, the treasury and other bank regulators announced that “no losses will be borne by the taxpayer.”

But the state’s bank regulator only guarantees deposits of up to $250,000.

FDIC established a “bridge” bank so that customers of failed banks could have easy access to their funds. The depositors and borrowers will automatically become customers of the bank.

In a related development, the London-based multinational bank HSBC bought SVB’s UK arm for 1 pound, equivalent to 1.2 US dollars.

Among all the dizzying developments, all eyes and ears are focused on the Fed, which has currently held interest rates at 4.5—4.75 percent. 

Analysts at Goldman Sachs say that the failure of several banks will force the Fed to back away from further interest rate hikes.

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