SVB Collapse: Re-examination of Deregulation, Inflation-Targeting Monetary policy

It’s 2023, and two major US banks, Silicon Valley Bank (SVB) and Signature Bank, collapsed within 48 hours. The impact of their collapse has rocked the financial sector. It reveals a new type of financial risk, partly driven by US central bank’s monetary policy to fight high inflation. The collapse of SVB, one of the most prominent lenders in the world of technology start-ups, and the shutdown of Signature Bank, followed by a sharp selloff in regional bank stocks, reveals the consequences of deregulation in the banking industry and the Federal Reserve’s monetary policy.

The collapse of Silicon Valley Bank

The Federal Reserve’s continuous policies to raise interest rates have caused changes on the asset and liability sides of SVB’s balance sheet. The low yield rates of US Treasury securities and US government agency obligations, in which SVB holds much of its assets, caused billions of unrealized losses in 2022 under the Federal Reserve’s tightening policy. In addition, as interest rates rise, it has become difficult for technology start-ups to borrow money from the market. As major depositors of SVB, these companies had no other way but to withdraw their deposits from the bank. Together, SVB faced substantial unrealized loss on the asset side and the outflow of deposits on the liability side. To deal with the situation, SVB executives decided to sell off the available-for-sale assets, which caused a realized loss of $1.8 billion. If SVB decides to sell its held-to-maturity asset, the unrealized loss of $15 billion would also be realized.

Anticipating these losses, it became rational for the bank’s customers to race to withdraw their money, which led to the collapse of SVB. The collapse of a major lender such as SVB could trigger a systematic bank run, which made the Federal Reserve nervous. Adding to the Federal Reserve’s worries, Signature Bank, another major lender in the US, was also on the brink of collapse.

The Collapse of Signature Bank

Following the collapse of SVB, Signature Bank, a regional bank, faced a similar fate. This led US regulators to shut down the bank amidst fears of systemic risk to the entire financial system. The Federal Reserve’s policies had made it difficult for regional banks to attract deposits, and Signature Bank was no exception. As more and more depositors withdrew their money, it was only a matter of time before the bank collapsed.

The Impact of Deregulation

The collapse of SVB and Signature Bank shows the consequences of deregulation in the banking industry. Deregulation allows for a freer market to operate, but it also means fewer safeguards are in place. As a result, banks can take more risks and are more vulnerable to volatile economic changes, such as the Federal Reserve’s monetary policies.

Key Takeaway

SVB and Signature Bank’s collapse revealed the risks involved in deregulation and the Federal Reserve’s monetary policies. The collapse of banks of such magnitude causes ripple effects throughout the banking sector, putting the entire financial system at risk. In addition, the Federal Reserve’s monetary policies, implemented to control inflation, have made it difficult for banks to attract deposits, leading to a race to withdraw depositors’ money. This, in turn, has led to the collapse of banks and poses a systemic risk to the entire financial market.

Related Facts

– The Federal Reserve created the Bank Term Funding Program (BTFP) to offer loans to eligible depository institutions pledging collateral.
– The Federal Reserve Board announced that it would make available additional funding to eligible depository institutions to ensure banks can meet the needs of all their depositors.
– The collapse of SVB and Signature Bank is not the only instance of banks failing in recent history. Other major banks, such as Lehman Brothers and Bear Stearns, collapsed in 2008 during the global financial crisis.

Conclusion

The collapse of SVB and Signature Bank has shown the risks involved in deregulation and the consequences of the Federal Reserve’s monetary policies. While the Federal Reserve’s policies were implemented to control inflation, they have made it difficult for banks to attract deposits, leading to a race to withdraw depositors’ money. This, in turn, has led to the collapse of banks and systemic risk to the entire financial market. It’s high time to re-examine the efficacy of monetary policies and the regulations of the banking sector to ensure that such catastrophic events do not occur again.