The collapse of Silicon Valley Bank (SVB), after 40 years of operation and having supported small companies, mainly in the technology area, has set off alarm bells in the financial markets. The fear is a repeat of the 2008 financial crisis in the United States.
Its bankruptcy occurs after having reached position 16 among the largest commercial banks in the United States, with assets that exceeded US$220,000 million in March of last year, a relative growth of 209.8% compared to the US$71,000 million reported at the end of the year. 2019. It had offices in the UK, Sweden, China, Denmark, Israel, Ireland, Canada and Germany.
The problem began to take shape after the rise in interest rates promoted by the United States Federal Reserve to contain inflation. This affected the SVB’s investment portfolio, where it had around 50% of client savings invested in Treasury bonds with yields no higher than 1.79%, lower than the 10-year 3.9% now offered by the market.
On the 9th of this month, the shares of Silicon Valley Bank plummeted more than 62%, according to specialized media reports, after the entity proposed to sell shares to face a loss of US$1.8 billion. This negative signal led some risk firms to advise their clients to withdraw their funds from that bank. In less than 12 hours there were withdrawals that exceeded US$40 billion.
Liliana Rojas Suárez, from the Center for Global Development, told CNN that after the collapse of Silicon Valley Bank, it will be necessary to see if the Federal Reserve will be able to raise the other 50 basis points it needs to control inflation. She says that it is understood that high interest rates could be a problem for the stability of the financial system. “Central banks must coordinate with supervisory systems and be sure that they can effectively carry out a contractionary monetary policy without generating serious financial problems like the ones we are seeing in the United States,” said the expert.
Process
As the days go by and the market reports are verified, other banks have faced problems, among which are First Republic Bank and PacWest Bancorp, whose stock market listings were halted on Monday after their shares plunged 65% and a 52%, respectively. The bankruptcy of the SVB is the biggest since the 2008 crisis when Washington Mutual happened.
The Dominican monetary authorities ruled out that the bankruptcy of Silicon Valley Bank and Signature Bank could affect the Dominican financial system, since it does not present direct interaction with these international entities.
The Monetary Board, meeting in extraordinary session to analyze the situation in the United States, highlighted the strength of the Dominican financial system, reflected in sufficient liquidity and capital provisions to absorb unexpected shocks and maintain the orderly functioning of the financial and payments market.
It was determined that the international reserves of the Central Bank, which to date amount to US$15,696.8 million, are not exposed to the affected entities and are invested in first line financial institutions and high credit quality.
The economists Luis Manuel Piantini and Alejandro Grisanti Capriles, as well as the executive president of the Association of Commercial Banks (ABA), Rosanna Ruiz, have their readings on this new bankruptcy case and what it could mean for the sector, both in the United States as in the region.
“Thank God, one of the foundations of economic stability is the resilience and robustness of the indicators of our financial system, occupying top positions in the region in liquidity, profitability, low delinquency and solvency,” said Ruiz, who indicated that a variable in favor of the country is that this bank is not on the list of correspondents, while highlighting the quality of supervision in the Dominican financial system.
Two sources from the state financial sector revealed that the issue is being actively monitored and that the collapsed entities did not directly have correspondents with Dominican banks, whose main counterparties in the United States are fundamentally the systemic global banks of that country, which They have been the least harmed at this juncture.
For Piantini, an economist and former vice-governor of the Central Bank of the Dominican Republic, the main reason for the financial collapse of that bank was the recklessness of the Federal Reserve in issuing enormous amounts of dollars in such a short period. “The American Secretary of the Treasury, Janet Yellen, reported that the banking system is solid and that this is an isolated case. However, that was the same position of the Treasury authorities when Lehman Brothers collapsed without the intervention of the monetary authorities, giving rise to the great banking crisis of 2008,” said Piantini.
It refers that, during the pandemic, the United States government reached a fiscal deficit of 26% of GDP as a result of its fiscal aid programs for individuals and companies, in compensation for the damage caused by the closure of the economy.
It should be noted that this aid was basically financed by the Federal Reserve, which doubled its monetary liabilities in two years. “This brutal overflow of liquidity accumulated in savings, reaching the excess of it to figures of US$1.7 trillion that today are used to complement the fall in the purchasing power of income due to high inflation. This enormous savings went to the banks, raising their liabilities, and in the case of Silicon Valley Bank, this money was used to purchase American public securities ”, he maintains.
The withdrawal of this enormous volume of money by the Federal Reserve, through the placement of public securities that it accumulated, has begun to dry up the markets, affecting liquidity, as is the case with Silicon Valley Bank, which motivated it to go public. market to sell public securities and with the rise in interest rates and depending on the maturity date, the prices of these securities, at the time of their sale, were lower than those recorded in their financial statements, giving rise to an accounting loss in the time of sale.
He emphasizes that this gave rise to the bank going on the market to sell shares to replace its lack of capital and comply with banking regulations. This departure alarmed clients, who went to the bank to withdraw their deposits, increasing their liquidity problem.
This situation, Piantini points out, led to the intervention of the bank by the banking supervision authorities, who have promised to return insured deposits of up to US$250,000 by cashier and for the value that exceeds it they would be given certificates to be exchanged with the recovery of the portfolio and other assets.
For the economist and director of Ecoanalítica, Alejandro Grisanti Capriles, there are two fundamental causes in the fall of Silicon Valley Bank. The first has to do with a very strong concentration in the technology sector, which has had extra requirements in recent months to use the cash deposited. He explains that to this situation is added that 2022 was the worst in the last 90 years in terms of bond yields with accumulated losses that were almost close to 20%.
“The natural market for buying these bonds is usually the banks. Here there was a combination of these two things: there was a large portfolio invested in bonds that lost value and caused losses to the bank and, on the other hand, a technology sector that has been suing for the reduction in cash availability, for what was coming taking it out (from the bank). That combination, in the end, is what ends up taking the bank out of balance and producing its intervention last week”, explained the economist.
He estimates that the consequences could be very important, since it was among the first 20 banks in the United States. He argues that these cases always uncover the doubt of a systemic risk, which is why savers get nervous. In his opinion, the response given by the Federal Reserve and the Treasury has been positive, since they have said that they will recognize up to 100% of the deposits and not up to the US$250,000 that the legislation provides.
Grisanti Capriles is among those who consider that the risks are mitigated, but understands that “when you see your neighbor’s beards burn, it is good to soak yours”, which is why the region needs a lot of strength and supervision in times of high volatility. . He affirms that getting ahead of problems, as was the case with the SVB, is a lesson that all Latin American countries should see.
Impact
The economist Luis Manuel Piantini points out that another bank intervened last week was Signature Bank, whose collapse was caused by the bankruptcy of a group of cryptocurrency companies that went bankrupt, with which the bank had a highly concentrated credit portfolio. .
He points out that what happened to Silicon Valley Bank, in its reduction in liquidity availability, could also be happening to other medium and small banks that have placed their portfolios in the real estate sector, which has been greatly affected by the decrease in the sale of real estate due to the increase in the financial cost of real estate loans, which doubled their interest rates, exceeding 6%.
It should be noted that this increase in rates acts on the variable rates of the loans granted, increasing delinquency in the recovery of that portfolio and affecting its liquidity and capital. In this sense, he understands that it is very possible that nervousness seizes the depositors in these medium and small banks causing their bankruptcies.
However, he believes that the large banks, due to their solidity and for “to big to be failed“They will be saved from these panic runs by avoiding entering another banking crisis like the one in 2008, although they understand that they will be affected by the fall in the value of their shares on the stock market.