the lessons of a bank failure


Ihe fall of Silicon Valley Bank (SVB) raised the specter of a new financial crisis. This establishment, whose main clientele is made up of American high-tech companies, was the subject of a panic which led to its bankruptcy. The SVB found itself unable to cope with the flood of requests for reimbursement of the deposits entrusted to it by its customers, forcing the American authorities to contain the fire.

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It is probably still too early to assess the consequences of the biggest bank failure since the financial crisis of 2008. Comparison is not correct. SVB is not Lehman Brothers. Their activity, their size and their interconnections with the rest of the banking sector have nothing to compare.

The catastrophic intervention of the American authorities, unsheathing a kind of “whatever it takes” that assures depositors to recover their assets, is supposed to stem a movement that would see customers of small banks transfer their savings to larger establishments more solid. Even if no public money is committed at this stage and that the shareholders and the directors of the bank will pay the pots broken, the operation shows that the regulations in force in the United States did not work. Once again, the intervention of the authorities was essential to try to avoid a new crisis.

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Despite its 210 billion dollars in assets (about 195 billion euros), SVB has gone under the radar of banking supervision, which requires institutions to have a sufficient liquidity cushion to face difficulties. Believing that this regulation was hampering the efficiency of the American banking sector, Donald Trump had decided in 2018 to raise from 50 billion to 250 billion the threshold from which these solvency rules apply.

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The boss of SVB, Greg Becker, who had engaged in intensive lobbying in this direction with the administration, therefore had a free hand to manage in a very questionable way the money of his customers in full view of the market. By investing the funds in US Treasury bills and real estate bonds, the leader found himself trapped by the rise in Federal Reserve rates, which rose from 0% to more than 4.5% in one year. However, when they go up, the value of the bonds goes down. When clients wanted to recover their assets, SBV suffered losses, which became unsustainable due to massive withdrawals.

The end of easy debt

Beyond the shortcomings of regulation, the impact of the rate hike is the second lesson to be drawn from the fall of the SVB. The end of free money remained for many months a theoretical concept, of which all the consequences were not taken into account. A first warning came in September 2022 in the UK, when, following soaring bond yields, UK pension funds came close to bankruptcy, forcing the Bank of England to intervene.

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More mishaps are to be expected, in a world that has become accustomed for too long to easy debt and abundant liquidity, leading to increasingly risky investment decisions. The purge promises to be all the more painful as the rise in interest rates is taking place at a rapid pace, while inflation is proving more difficult to control than expected. It is time for regulation and investor behavior to adapt to an environment that has become much more unstable.

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