Silicon Valley Bank is falling down
Bank shares around the world dropped on Monday after the collapse of Silicon Valley Bank and Signature Bank, despite reassurances from US President Joe Biden that the financial system is safe. The closure of Silicon Valley Bank was due to higher interest rates affecting the sale of assets. The collapse led to customers racing to withdraw their funds, causing a cash crisis. The instability has caused concern about similar problems at other firms, leading to a decline in share prices globally.
Despite the US president’s assurances that the country’s financial system is secure, bank shares worldwide plummeted on Monday. This followed the collapse of Silicon Valley Bank (SVB) and Signature Bank, which led authorities to intervene to safeguard customer deposits. Joe Biden pledged to take all necessary measures to ensure the stability of the banking system. However, investors remain concerned that other lenders could face similar problems, causing a significant decline in share prices worldwide.
At one point on Monday, the share prices of Santander in Spain and Commerzbank in Germany plummeted by over 10%. In the biggest failure since 2008, a US bank was taken over. The slump in Silicon Valley Bank affected financial shares, and rising interest rates may reveal more problematic situations. Despite assurances to customers about having adequate liquidity to withstand shocks, several smaller US banks experienced even more significant losses than their European counterparts. This instability has sparked speculation that the Federal Reserve may postpone its efforts to increase interest rates to curb inflation.
Following the government’s intervention to safeguard their deposits fully, President Biden announced that individuals and businesses with accounts at Silicon Valley Bank would have full access to their funds starting on Monday. Many of the bank’s business customers had faced the possibility of being unable to pay their staff and suppliers when their accounts were frozen. BBC North America Technology correspondent, James Clayton, spoke with individuals who had been waiting in line all day outside the SVB branch in Menlo Park, California, to access their funds. As wire transfers were no longer available, they were withdrawing their money in the form of cashier’s checks.
How did it happened ?
US regulators seized the assets of Silicon Valley Bank, a bank that specialized in lending to technology companies, resulting in its closure on Friday. This was the largest failure of a US bank since the 2008 financial crisis. The bank had attempted to raise funds to cover a loss caused by the sale of assets impacted by higher interest rates. News of the bank’s difficulties led to a rush by customers to withdraw their funds, causing a cash crisis. On Sunday, regulators also took over Signature Bank in New York, which had numerous clients involved in cryptocurrency and was considered to be the institution most at risk of a similar bank run. President Biden promised that the deposit protection would be funded by the fees regulators charge to banks rather than taxpayers. In an effort to restore confidence, US regulators also introduced a new method for banks to borrow emergency funds during a crisis. However, there is concern that these failures, which followed the collapse of Silvergate Bank the previous week, are an indication of issues at other companies. Paul Ashworth of Capital Economics commented that US authorities had acted “aggressively to prevent contagion from developing,” but noted that there was no guarantee that their efforts would succeed, as contagion is often driven by irrational fear. Danni Hewson, head of financial analysis at stockbrokers AJ Bell, expressed concern that some banks may find it challenging to cope with high-interest rates. Despite President Biden’s assurance that he would do whatever is necessary to prevent further failures, bank stocks in the US fell.