Rabat – After days of flooding, howling winds now batters Silicon Valley, knocking over trees and electricity poles at America’s technological heart. The tempestuous weather reflects an abstract but critical turmoil unfolding there — in the numerical world of banking.
The collapse of Silicon Valley Bank (SVB) has been making headlines worldwide, evoking fears of the 2008 financial crisis. Here’s what happened and why it matters.
Timeline: the built-up to failure
Founded in 1983 for small tech startups, the SVB grew alongside the global hub for technology and innovation. There, the bank was an omnipresent force in every aspect of tech, supporting fledgling companies that are today the top giants in the industry.
Under chief executive officer Gregory Becker’s reign, the bank’s deposits ballooned from $49 billion in 2018 to $189.2 billion in 2021. With the influx of money, the bank chose to invest heavily in long-duration government bonds, which are due after decades but offer higher interest rates, instead of short-duration bonds that are due sooner but offer lower interest rates.
As interest rates rose recently, investors in SVB decided to withdraw their deposits. This put the bank in a difficult situation: in order to avoid running out of money for withdrawal, it had to sell its long-duration bonds at a loss. By the week of February 27, SVB was frantically consulting Goldman Sachs for a solution.
On March 8, SVB stated that it had sold $21 billion of its debt at a loss of $1.8 billion. The show of weakness proved detrimental, as clients rushed to pull their deposits in fear, totalling a $42 billion withdrawal on March 9 alone. The fate SVB was scrambling to avoid, a run on the bank, had happened.
By March 10, SBV’s stock trading halted and the U.S. Federal Deposit Insurance Corporation (FDIC) seized the bank.
As Danny Moses, known for predicting the 2008 financial crisis, told the New York Times, “It was complete and utter bad risk management on the part of SVB.”
What is the U.S. government doing?
The financial storm in Silicon Valley set off a flurry of discussions and decisions across the continent in Washington D.C.
Initially government officials had reservations against an intervention: SVB catered toward rich investors and so was perhaps unlikely to trigger a financial crisis. Moreover, as SVB’s collapse was of its own wrongdoing, the government did not want to encourage future risky behavior from banks by rescuing SVB.
However, as signs appeared that the wildfire may spread to other financial institutions, U.S. president Joseph Biden and treasury secretary Janet Yellen began preparing the biggest emergency intervention in the banking system since 2008.
On March 12, the administration announced its plan: All customers who deposited in the bank have their money protected, not with taxpayer money but with banks’ fees to the Deposit Insurance Fund.
“Your deposits will be there when you need them,” Biden remarked at the White House briefing room.
By March 14, the financial system appeared to have stabilized, with regional bank stocks rebounding and the deposit withdrawal rates slowing.
Global implications
The initial stabilization soon lost its firm footing on March 15 as the fear of banking failures spread worldwide.
The Swiss bank Credit Suisse lost almost 25% of its value, while France’s Societe Generale and BNP Paribas lost about 10%, Germany’s Deutsche Bank lost about 8% and Britain’s Barclays lost about 7%. The stock market index S&P 500 fell by 1.6%.
Silicon Valley tech companies were not the only investors in SVB. Rather, companies around the world, including the UK, Hongkong, Ukraine, and beyond are feeling the impacts, CEOs told Reuters.
Recalling the 2008 financial crisis, the brewing storm that culminated in the Lehman Brothers’s failure rippled across world economies. With Morocco’s close economic ties to Europe and the rest of the world, the developing situation catalyzed by SVB is one that calls for close monitoring.
