AA Edit | US bank collapse: Are we any wiser after 2008?
The primary reason for the SVB collapse was because interest rates have been increasing for a year now
An eponymously named Silicon Valley Bank collapsed last Friday in California after facing inadequate liquidity and insolvency and the effect could be seen in bourses around the world before they closed for the weekend. Fears of a repeat of 2008 may have been dissipating, thanks to the unique identity of the United States’ 16th largest bank with assets of about $209 billion that catered almost exclusively to the tech world. But, as some asset valuations fell, including in mercurial cryptocurrencies, even mild shades of panic were sufficient to cause a ripple in the unregulated casino-like technology environment, most of all in the start-up and private equity sectors.
The collapse of SVB, ironically celebrating a high rating from a magazine famous for computing the wealth of the richest and film and sports celebrities, and earlier that of another bank Silvergate Capital, besides the problem that a major crypto company is facing as it has $3b tied to SVB, could be brushed aside as the occasional bad roll of the dice of capitalism. But its repercussions will be felt the most by a growing army of the unemployed in the celebrated tech sector of the new economy that has lately been stripping its workforce in mass layoffs of all employees but the most essential. And SVB, even with an extremely online clientele, has about 8,500 employees.
It was a classic run on the bank, brought on by the frazzled nerves of a community of fintech and start-ups people who are logged in every minute into the minute details of the working of financial regulations, which led to depositors lining up to withdraw money, though the US regulators acted with alacrity to take control of SVB. It is no consolation that, in these bizarre circumstances, Elon Musk, the maverick who is the world’s second richest person, believes he could bid for the bank. Needless to say, any big bank subsuming SVB in its operations and bailing out its larger depositors would be in the best interest of all.
A comical mix-up due to an Indian cooperative bank bearing the same abbreviation of SVB aside, there are grave implications to the collapse of any bank in today’s interconnected world. The primary reason for the SVB collapse was because interest rates have been increasing for a year now thanks to Fed policy, and globally too, while bonds began tanking.
It is arguable whether interest rate raises have controlled runaway inflation as the economic fragility caused by a high interest rate regime is all too obvious now. The old saw about growth versus inflation kicks in here. But the rising cost of money harms not only venture capital funds just as fall in stock market valuations affects not only the high rollers.
The great days of the immediate post-pandemic period are long gone. As costs creep up and low growth kicks in, volatility lies ahead and not only in the bourses, which will merely reflect the changing situations. What may have helped contain this to one or two banks tied to the tech industry collapsing are the stricter US banking regulations in the wake of the 2008 global meltdown brought on by casino capitalism and its subprime brainchild spawning the crisis. The question is whether we are any wiser a decade and a half after the global economy came to its knees.