The times of marathon meetings that stretch through the weekend and last-minute decisions just before the banks open their doors on Monday seemed behind them like a bitter memory of the financial crisis. In the United States they have returned. The Federal Reserve, the Treasury Department and the regulatory body agreed this Sunday to guarantee the deposits of all clients of the Californian Silicon Valley Bank and the New York Signature Bank, after the bankruptcy of both, as well as offer the rest of the sector a line of loans to avoid new tensions. Wall Street futures initially received the news with increases, but it has not served so far to stop the cascading effect: the Californians First Republic Bank and PacWest Bancorp, and the Western Alliance Bancorporation, based in Phoenix (Arizona), are now in the epicenter of the hurricane, with major collapses before the session begins. These are the keys to the earthquake that is ravaging regional banking in the US and threatening to cause a domino effect.
How it all started?
Silicon Valley Bank, whose main clients are emerging technology companies, the so-called startups, announced on Wednesday a plan to increase capital by more than 2,000 million dollars. In an environment of rising interest rates and fears of a recession, she was suffering from large withdrawals, so she was forced to look for cash. In addition, within that same strategy of reinforcing herself, she announced the sale of a bond portfolio worth 21,000 million dollars. The operation, precipitated by its cash needs, resulted in losses of 1,800 million dollars. When the market opened the next day, the company’s shares fell 60%, because any capital increase implies a dilution that harms its owners, and because that hasty transaction with its bonds did not convey security, no matter how much Greg Becker, CEO of the firm, go out in public to ask investors to calm down.
The stampede was not a matter of a day: before starting to trade on Friday, Silicon Valley Bank lost another 60%. To funds with shares in startups They feared that the money would be blocked if there was a bankruptcy, and with alarm bells blaring on social networks, Zoom video calls and messaging chats, stopping the flight of capital was impossible. 42,000 million left the entity, its listing was suspended, a buyer was sought who did not appear, its public intervention was announced, and the authorities reported that client money with up to $250,000 was protected. That was far from consoling: 96% of clients had more money, not surprisingly for tech companies that used those accounts to pay payroll or raise capital.
The second largest bankruptcy of a commercial bank since Washington Mutual in 2008 was thus becoming a reality. The entity was ranked 16th in the list of the largest banks in the country, and as of December 31, 2022, it had some 209,000 million dollars in assets (196,000 million euros) and 175,400 million in deposits.
Once the fall of Silicon Valley Bank was consummated, in record time, questions began to surface. What will happen on Monday when customers with more than $250,000 try to withdraw money? Will the thousands of trapped technology companies be able to pay the payrolls, scheduled for the 15th? Would other regional banks follow the same path? The weekend seemed essential to build a firewall and restore confidence. The solution came on Sunday afternoon: exceptionally, the US authorities will ensure that all deposits, including those over $250,000, are available this Monday. And a line of credit is launched for banks that need capital, a way to avoid having to part with bonds in losses as happened to Silicon Valley Bank.
One of the most contentious issues when it comes to protecting the funds of a failed private entity is who will foot the bill. Using taxpayers’ money generates the debate about why when there are losses they are socialized and the same does not happen with the benefits. For this reason, the US has ensured that the measure will be free for the taxpayer. If Silicon Valley Bank’s assets are not sufficient to meet all the demand for money from its clients, the deficit will be financed with funds from the rest of the banks. Unlike what happened with the parent company, the British division of Silicon Valley has found a buyer: HSBC has bought it in exchange for a pound amid concern about British technology companies, which are highly exposed to the bank.
Signature Bank also falls
Along with the announcement that all deposits are guaranteed, the US authorities reported on Sunday the closure of Signature Bank, a New York entity that had recently been penalized for its exposure to cryptocurrencies. It was the 29th largest bank in the US, with $110 billion in assets and $88 billion in deposits, about half that of Silicon Valley Bank. The abrupt end of another entity in a matter of hours made the worst fears come true: one could no longer speak of an isolated case.
What about shareholders?
The billions of stock market value of Silicon Valley Bank and Signature Bank have evaporated. And if depositors will not lose a penny of their money, the fate of shareholders and holders of a certain debt will be different: Washington does not contemplate any type of compensation for them. Unlike what happens with the accounts for companies and individuals to operate on a day-to-day basis in the real economy, the authorities believe that the risk linked to the evolution of the share price is the decision of those who venture to invest.
Is the crisis over?
The initial reaction of the markets to the firewall implemented by Washington was positive. With tech out of the woods and Wall Street futures rising, it looked like the fix might be enough to calm markets. But the joy was short-lived: the Californian First Republic Bank, valued at more than 15,000 million dollars, loses almost 70% in operations prior to the opening of Wall Street; the Western Alliance Bancorporation, based in Phoenix (Arizona) and a capitalization of more than 5,000 million, leaves more than 30%. A destruction similar to that suffered by PacWest Bancorp, valued at 1,500 million. All of them threaten to become the next dominoes to fall.
Why doesn’t the bleeding stop? Many clients, faced with the possibility that their savings and deposits may be affected, are opting to transfer their funds to the largest banks, which in this turbulent environment are a priori safer than the regional ones. This snowball, a mixture of distrust, negative news, and rapid digital access by customers to move money from one point to another, is very difficult to stop once it has gone downhill at full speed, and the authorities are now working on it. In the US, investors in the stock market have seen how the owners of shares of Silicon Valley Bank and Signature Bank have been left unprotected, and have fled from entities with a similar profile or size.
In a sector as interconnected as banking, the scope of the collapse is being global. The European stock market suffered heavy losses this Monday, of more than 3% in the case of the Ibex, with the bank as the main victim. BBVA loses more than 6%, Santander 7% and Sabadell exceeds double digits. Among the European ones, Credit Suisse stands out, which now adds a context of quicksand to its own serious internal crisis. Their titles are around 9% drop.
Its consequences may even reach monetary policy. For Capital Economics, the coming days and weeks “will be crucial” in determining the extent of the contagion. Neil Shearing, its chief economist, believes that bankruptcies “are a warning that things can break down when rates rise sharply.” And he thinks it provides an argument for those who want to slow down on rate tightening from now on. Goldman Sachs goes further. He predicts that the Federal Reserve will not raise rates at its meeting next week, contrary to expectations, to avoid worsening the banking crisis.
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