The collapse of Silicon Valley Bank (SVB) has sent tremors through financial markets as investors try to work out its wider implications. The most obvious are failures of management by the bank and its board and – crucially – of regulation by the US authorities.
Following the regulatory crackdown after the financial crash, SVB and other small and medium -sized US lenders successfully lobbied for looser regulation, which was introduced during the Trump presidency. The price of this decision – and of greed and incompetence by the bank’s management – is now being paid.
The crisis was triggered by the sharp rise in US interest rates over the past year. SVB had been flush with cash deposited by its successful tech industry clients and had put much of this as an investment into long-term US government bonds. These collapsed in value as interest rates rose, and funding pressure on the bank was increased by the problems in the tech industry.
Banking is based on confidence and once the bank had to announce that it was selling some of its bonds to address funding problems, deposits started to flow out and the situation quickly worsened. The US authorities, having failed to sell the bank over the weekend, had to step in. Notably, depositors are to get their money back and funding from the Federal Reserve system to other banks will protect against the fall in value of their bond holdings. For Ireland, SVB was a significant funder of the tech sector, through its UK unit, now taken over by HSBC.
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This is not a re-run of 2008, but parts of the banking system are again getting a bail-out, with all the moral hazard that entails. The US authorities moved quickly to try to avoid contagion, but the shares of many smaller American banks have fallen sharply, as depositors move cash to big institutions. Pressure on financial shares has spread worldwide. This is based more on a general concern about what other issues may emerge due to the rapid rise in interest rates than (apart from ones or two exceptions) specific fears.
The longer-term implications of this will take time to play out, but it sends a clear message to regulators. Tough and appropriate regulation is vital. The financial sector has complained about the burden of regulation, but talk of “light-touch” oversight of smaller US lenders raises uncomfortable echoes of Ireland in the run up to the crash. The price of bank failure is so great that nothing can be taken for granted.
The collapse now raises questions for central banks about the pace of interest rate increases. Having been caught out by rising inflation, central banks have been racing to catch up. But will other risks in the financial sector emerge - after years of cheap cash – if interest rates continue to rise at a rapid pace into the summer?