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A finance expert explains the impact of the Silicon Valley Bank collapse

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Silicon Valley Bank biggest US lender to fail since 2008 financial crisis – a finance expert explains the impact

Silicon Valley Bank, which catered to the tech industry for three decades, collapsed on March 10, 2023, after the Santa Clara, California-based lender suffered from an old-fashioned bank run. State regulators seized the bank and made the Federal Deposit Insurance Corporation its receiver.

SVB, as it’s known, was the biggest U.S. lender to fail since the 2008 global financial crisis – and the second-biggest ever.

We asked William Chittenden, associate professor of finance at Texas State University, to explain what happened and whether Americans should be worried about the safety of their financial system.

The short answer is that SVB did not have enough cash to pay depositors so the regulators closed the bank.

The longer answer begins during in the pandemic, when SVB and many other banks were raking in more deposits than they could lend out to borrowers. In 2021, deposits at SVB doubled.

But they had to do something with all that money. So, what they could not lend out, they invested in ultra-safe U.S. Treasury securities. The problem is the rapid increase in interest rates in 2022 and 2023 caused the value of these securities to plunge. A characteristic of bonds and similar securities is that when yields or interest rates go up, prices go down, and vice versa.

The bank recently said it took a US$1.8 billion hit on the sale of some of those securities and they were unable to raise capital to offset the loss as their stock began dropping. That prompted prominent venture capital firms to advise the companies they invest in to pull their business from Silicon Valley Bank. This had a snowball effect that led a growing number of SVB depositors to withdraw their money too.

The investment losses, coupled with the withdrawals, were so large that regulators had no choice but to step in to shut the bank down to protect depositors.

Government intervention

From a practical perspective, the FDIC is now running the bank.

It is typical for the FDIC to shut a bank down on a Friday and have the bank reopen the following Monday. In this case, the FDIC has already announced that the bank will reopen on March 13 as the Deposit Insurance National Bank of Santa Clara.

At the end of 2022, SVB had $175.4 billion in deposits. It’s not clear how much of those deposits remain with the bank and how much of those are insured and 100% safe.

For depositors with $250,000 or less in cash at SVB, the FDIC said that customers will have access to all of their money when the bank reopens.

For those with uninsured deposits at SVB – basically anything above the FDIC limit of $250,000 – they may or may not receive back the rest of their money. These depositors will be given a “Receiver’s Certificate” by the FDIC for the uninsured amount of their deposits. The FDIC has already said it will pay some of the uninsured deposits by next week, with additional payments possible as the regulator liquidates SVB’s assets. But if SVB’s investments have to be sold at a significant loss, uninsured depositors may not get any additional payment.

Prior to the failure of SVB, the most recent bank failures occurred in October 2020, when both Almena State Bank in Kansas and First City Bank of Florida were taken over by the FDIC.

Both of these banks were relatively small – with about $200 million in deposits combined.

Banking failure

SVB was the biggest bank to fail since September 2008, when Washington Mutual failed with $307 billion in assets. WaMu fell in the wake of investment bank Lehman Brothers’ collapse, which nearly took down the global financial system.

On the whole, U.S. bank failures aren’t all that common. For example, there were none in 2021 and 2022.

At the end of 2022, SVB was the 16th-largest bank in the United States with $209 billion in assets.

That sounds like a lot – and it is – but that’s just 0.91% of all banking assets in the U.S. There is little risk that SVB’s failure will spill over to other banks.

Having said that, SVB’s collapse does highlight the risk that many banks have in their investment portfolios. If interest rates continue to rise, and the Federal Reserve has indicated that they will, the value of the investment portfolios of banks across the U.S. will continue to go down.

While these losses are just on paper – meaning they’re not realized until the assets are sold – they still can increase a bank’s overall risk. How much the risk will go up will vary from bank to bank.

The good news is that most banks currently have enough capital to absorb these losses – however large – in part because of efforts taken by the Fed after the 2008 financial crisis to ensure financial firms can weather any storm.

So rest easy for now, the banking system is sound.

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Money

Dow rises 400 points as trade tensions ease

Dow climbs 400 points as trade tensions ease, Trump signals no plan to fire Fed Chairman Powell.

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Dow climbs 400 points as trade tensions ease, Trump signals no plan to fire Fed Chairman Powell.

In Short

Stocks rose significantly on Wednesday, with the Dow up 461 points amid optimism about reduced U.S.-China tariffs.

Investors reacted positively to President Trump’s comments on trade, improving overall market sentiment after a four-day losing streak.

Stocks saw significant movement on Wednesday, with the Dow Jones Industrial Average rising by 461 points, or 1.2%.

The S&P 500 and Nasdaq Composite also experienced gains of 1.7% and 2.6%, respectively.

Initially, the Dow surged by 1,100 points due to optimism surrounding U.S.-China trade relations.

President Donald Trump indicated a willingness to adopt a less aggressive trade strategy, suggesting that the current 145% tariff on imports from China would be significantly reduced but not eliminated entirely.

Trade agreement

Treasury Secretary Scott Bessent commented on the potential for a beneficial trade agreement between the two nations, expressing a desire for joint efforts to address trade imbalances.

Market reactions reflected relief at the prospect of eased tensions, with Keith Buchanan from Globalt Investments noting that investors were hopeful the worst might be over, though uncertainties remain.

Reports indicated that the U.S. administration was contemplating reducing tariffs on China to between 50% and 65%, contingent upon mutual concessions from both countries.

Stocks affected by trade dynamics, particularly tech companies like Apple and Nvidia, showed marked increases, with Tesla’s shares rising 5% partly attributed to these easing tariff concerns.

Investor sentiment improved further when Trump reaffirmed that he has no intention of dismissing Federal Reserve Chairman Jerome Powell, a shift from his previous criticism of Powell’s leadership.

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Money

Credit-card firms prepare for economic downturn risks

Credit card companies prepare for economic downturn; rising delinquencies prompt tighter lending despite continued consumer spending.

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Credit card companies prepare for economic downturn; rising delinquencies prompt tighter lending despite continued consumer spending.

In Short

US credit card companies are preparing for a possible economic downturn by tightening lending and increasing reserves, even as consumer spending remains high.

While the wealthy continue to spend, access to credit is diminishing for lower-income individuals, and caution is growing among banks.

Credit card companies in the US are preparing for a potential economic downturn despite current consumer spending levels. Businesses are increasing reserves and tightening lending as delinquencies rise to pre-pandemic levels.

JPMorgan Chase and Citigroup have augmented their rainy day funds to mitigate expected losses. Retail card issuer Synchrony is applying stricter lending criteria, while U.S. Bancorp is targeting wealthier customers to reduce risk.

Although large lenders are still reporting profits, the effects of Trump’s trade war have yet to reflect in financial results. Recent data shows that Americans are spending and borrowing at a faster pace compared to last year.

Travel and entertainment

However, there are warning signs as consumers begin to cut back on nonessential expenditures such as travel and entertainment. The trend of cardholders making only minimum payments is above pre-pandemic levels.

Despite consumers showing confidence in spending in early April, banks remain cautious. They are redirecting their marketing strategies towards affluent households, recognising that the wealthiest individuals account for a significant proportion of total spending.

Conversely, access to credit is tightening for lower-income individuals, with Synchrony reporting declines in active accounts and purchase volumes. American Express, meanwhile, continues to perform well among high-income clients, with strong consumer spending growth reported.

Unemployment rates among white-collar workers remain low, offering some stability in credit card portfolios for certain issuers.

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Money

U.S. shares rebound amid tariff negotiation optimism

U.S. shares rebound over 2.5% amid tariff optimism, despite economic warnings and mixed global market performance.

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U.S. shares rebound over 2.5% amid tariff optimism, despite economic warnings and mixed global market performance.

In Short

U.S. shares rebounded significantly due to optimism over tariff negotiations, with major indexes rising over 2.5%. However, companies continue to face challenges from tariffs and uncertainty in the market, leading to mixed results overseas.

U.S. shares saw a significant rebound on Tuesday, with major indexes increasing by over 2.5%.

This recovery was influenced by optimism regarding tariff negotiations, as noted by Treasury Secretary Scott Bessent, who expressed confidence in a potential de-escalation of the trade war with China.

Despite this positive sentiment, companies are still grappling with the effects of the Trump administration’s tariffs.

Defense contractor RTX announced an anticipated $850 million financial impact, and Kimberly-Clark cited a “global geopolitical landscape” for a lowered profit outlook.

Economic forecasts

The International Monetary Fund has revised its economic forecasts for the U.S. and globally, highlighting tariffs as a factor in slower growth.

Goldman Sachs CEO David Solomon indicated that high levels of uncertainty are hindering corporate decisions and impacting asset prices, and the Institute of International Finance warned of a probable U.S. recession later this year.

Gold prices have fluctuated, retreating after reaching a record high on Tuesday, reinforcing its status in uncertain markets.

Tesla’s quarterly earnings did not meet estimates, but the company’s share price remained stable.

Concerns about President Trump’s trade policies and his remarks regarding Federal Reserve Chair Jerome Powell contributed to market volatility earlier in the week.

In trading results, the Dow Jones increased by 1,017 points or 2.7%, while the Nasdaq and S&P 500 both rose by 2.7% and 2.5%, respectively.

Treasury yields decreased slightly, and Bitcoin’s value climbed past $91,000.

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