Less than two weeks ago, the U.S. American Silicon Valley Bank (SVB) went bankrupt. Since it manages the funds of several Silicon Valley companies that belong in a growth industry in the U.S., there is a worry that the event can start a domino effect. There is already a ripple effect observable globally – will it wear off before it leads to a new recession?
Assets at the Silicon Valley Bank
The 2008 recession was caused by the bursting of the property bubble in the U.S. Banks kept an inordinate proportion of their money in subprime assets, mostly property related loans. When the property bubble burst, these assets lost their value, and many banks became insolvent. Since then, banks “learned” that they would do better if they kept their capital in more stable assets – such as government bonds.
However, it is still risky not to diversify the portfolio, and this is exactly where SVB made a mistake. Most of its capital was kept in U.S. government bonds. However, thanks to a recent interest rate increase, old bonds lost much of their value. As a result, SVB was now trapped. Because of the increase of the interest rates, depositors rightfully expected higher interest rates on their own money, but the value of available assets had just dropped, while the price of new ones went up. This was picked up by the news, and caused a panic.
Banks run on trust
For a bank to be viable, depositors must trust that deposited sums can be returned to them at any time – even though it is normal for banks to provide more loans than can be covered by the deposits it manages. Thanks to that, even if a bank gets into a tricky situation like the one described above, that still can be resolved unless depositors start to retrieve their deposits in in large numbers for fear of other depositors squeezing the bank dry before they could get their money back. This way the bank loses even its remaining liquidity and goes bankrupt.
Countermeasures in the U.S. and around the world
To prevent ripple effects from spilling over to other small banks and other sectors, the FED and the FDIC intervened with a set of measures to protect clients of SVB. This is supposed to stop the domino effect before it can escalate too far, although some after effects are still to be expected. At the same time, European banks now follow stricter regulations, including regarding capital adequacy (the ratio of loans and debits). As a result, in the near future it might become more difficult to get loans (they will have higher interest rates), especially in the current high-inflation environment. Accordingly, economic growth is expected to slow down even more.
Credit Suisse to be bought by rival UBS
More or less independent from the bankruptcy of SVB, Credit Suisse also went bankrupt last week. Problems were visible since last fall, but the panic only started after a recent press release that intended to reassure investors who started to worry after its shares started to lose value. Credit Suisse then received a major, ca. EU 5 billion “lifeline” from the Swiss central bank, but it seemed insufficient. In latest news, its rival, UBS is said to have agreed to buy the bank, which is considered a positive development both by the Bank of England, the FED and the European Central Bank.
Bank shares took a nosedive everywhere
As a result of the events of the last few weeks, the prices of bank shares took a nosedive around the world. Trust is essential not only for the day-to-day operation of banks but also in the market, and the recent events connected to SVB and Credit Suisse had a serious impact on that trust. Investors suffered serious losses. Thanks to the quick measures, however, the market will hopefully recover in time, most probably without creating a crisis on the scale seen in 2008.
Precise accountancy is your best ally
In such an uncertain environment, it is absolutely crucial that you work in close cooperation with a precise accountant that can help you stay on top of your finances and make informed business decisions. Helpers Finance can provide you just that, thanks to its extensive experience in working with foreign owned small and medium-sized companies in Hungary.
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