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Monday, March 27, 2023

Silicon Valley Bank fall shakes financial market confidence


The Silicon Valley Bank (SVB) collapsed on Friday after it failed to secure a capital increase and subsequently was placed under the control of US regulators. Little known to the general public, SVB specialized in financing startups and had become the 16th largest US bank by assets. At the end of 2022, it had $209 billion (€195 billion) in assets and about $175.4 billion in deposits.

Over the weekend, US financial authorities also shut down another financial institution, New York-based Signature Bank, after customers started to pull their funds out of the bank massively.

In a joint statement on Sunday, the US Federal Reserve, the Federal Deposit Insurance Corporation (FDIC) and the Treasury Department said SVB depositors would have access to “all of their money” starting Monday and that American taxpayers would not have to foot the bill. The Fed announced it would make extra funding available to banks to help them meet the needs of depositors, which would include withdrawals.

A notice on the front door of the SVB headquarters in San Fransisco told customers the bank was closed for bankruptcyImage: Krystal Hu/REUTERS

Despite the reassurances, fears of contagion remain — including among investors in Germany. After significant losses on Friday, the stock market in Frankfurt continued to go downhill at the beginning of the week.

“Investors’ concern is that more banks could throw in the towel in the face of rising interest rates and yields,” said Christian Henke of IG Markets.

‘Who else is out there?’

Moritz Schularick, an economics professor at the University of Bonn, believes the “decisive action” by regulators has reduced the risk of further bank failures. “The US Treasury and the Federal Reserve put something in place over the weekend that should reassure depositors of these two banks,” Schularick told DW.

At the same time, however, he said the world should stay alert to the over-arching problems facing the global financial sector: “These things are inherently difficult to forecast and the truth is that the problems that brought down Silicon Valley Bank and Signature Bank are not limited to these two banks. So the question is: Who else is out there?”

‘SVB contagion risk reduced’

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The SVB’s collapse came after the bank was forced to sell bonds to meet the financial demands of some startups that wanted to pull funds out of the bank. As a result, SVB  was hit with huge losses — due to falling bond prices amid rising interest rates — and had to carry out an emergency capital increase, which eventually failed.

Fear of contagion

Fear of contagion from the collapse forced US authorities to intervene so decisively, emphasizing above all that customers’ deposits were safe. After all, the nightmare of bank and financial supervisors is a so-called bank run. This is when customers virtually storm a bank to bring their savings to safety. If a large number of customers do this at the same time, banks end up being overwhelmed because they do not have enough capital available to service all the claims. The consequences were seen during the global financial crisis of 2008 when the financial sector was on the verge of a “meltdown.”

However, the Center for European Economic Research (ZEW) does not expect a new global financial crisis after the closure of the two banks. “As a startup financier, SVB’s business model is a very special one,” said Friedrich Heinemann, head of the Corporate Taxation and Public Finance research department at ZEW. “In this respect, I do not expect it to expand to become a financial crisis.”

‘No impact on the German financial system’

The Association of German Banks also said German banks were “robust, stable and resilient.” In a statement to DW, it said the German financial institutions had “massively increased capital” since the banking and financial crisis of 2008.

“There is no impact on the German banking system due to the collapse of the bank. Nor is there any demand on German deposit insurance,” said a spokesperson for the association.

Unlike the banking supervisors of the European Central Bank (ECB), who initially did not plan an emergency meeting, Germany’s Bundesbank established a crisis team to discuss possible implications for the German financial sector.

In addition, the country’s financial services regulator Bafin imposed a moratorium on Silicon Valley Bank’s German branch, meaning a ban on sales and payments. In a statement, the regulator stressed that the institution has “no systemic relevance” and therefore “does not pose a threat to financial stability.”

Frankfurt am Main skyline of the city centre with high-rise buildings and the building of the European Central Bank ECB
The ECB in Frankfurt sees no reason to call an emergency meeting over the SVB’s collapseImage: imago images/J.Tack

According to the latest annual financial statements, the total assets of the SVB’s Frankfurt branch amounted to just under €790 million ($843 million) in Germany, Bafin said. By comparison, the assets of Germany’s biggest private lender, Deutsche Bank, amounted to €1.3 trillion in 2022.

Despite the US efforts to shore up confidence in the banking systems, major European stock markets were down sharply on Monday morning. In Frankfurt, shares in Deutsche Bank had plunged more than 6.7% by 9.45 a.m. GMT. Germany’s second-largest lender Commerzbank was down nearly 12%.

This article was originally published in German.



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