The Biden’s administration was forced to bail two major banks out after their collapse. A recession might be around the corner.
Almost 15 years ago, in 2008, the world witnessed the worst financial crisis in almost a century. Millions of people lost their jobs and savings, and some countries are still trying to recover. However, there are some gloomy signs that history is about to repeat itself.
The Silicon Valley Bank, US’ 16th largest financial institution, collapsed in the weekend after regulators seized its assets. SVB’s fall followed by mere days the collapse of another major American bank: Silvergate.
Neither of these banks could withstand investors pulling their money out following the Fed’s last interest rate hike. SVB specialized in lending to technological companies and was the sacrificial lamb for the tech industries.
Big tech saw its shares plummet over the course of 2022, and the constant increase of interest rate made their situation only worse. More and more of their assets were affected by the interest rate hike, and banks could hardly follow along.
SVB couldn’t raise enough money as more and more investors were withdrawing their funds. The collapse was inevitable.
A similar fate was reserved to Silvergate, except they operated in the ever volatile crypto sector.
Paper over the cracks
SVB was the largest financial institution to collapse since 2008, and other banks scrambled to avoid an avalanche effect that would destroy the whole economy. HSBC acquired SVB’s British branche for £1 and many Western governments attempted to step in and regulate the crash.
The Canadian government took temporary control of the local SVB branch, while US president Joe Biden said they will do “whatever is needed” to keep the situation under control.
In short, the US government will bail out SVB creditors, hence avoiding a general crisis. The funds will be provided by fees regulators.
Capital Economics’ chief Paul Ashworth explained the move: “rationally, this should be enough to stop any contagion from spreading and taking down more banks, which can happen in the blink of an eye in the digital age.”
“But,” he continued, “contagion has always been more about irrational fear, so we would stress that there is no guarantee this will work.”
Indeed many fear that this is not an isolated case and instead is the prelude for something much worse.
This crisis was generated by the Federal Reserve raise of interest rates, which is not supposed to stop at least until September. And the Fed is going into this knowing full well a recession is more than likely.
And the fall of SVB and Silvergate signal that a recession might be closer than previously thought.
