International Desk: Silicon Valley Bank (SVB) in the United States will sell shares worth $225 million to strengthen its balance sheet. The startup lender made an announcement last Wednesday. But this one announcement has become tomorrow for him.
Because of this, the announcement created panic among the customers and investors of the bank. The next day, the bank’s share price fell by 60 percent. Last Thursday, depositors withdrew 4 thousand 200 million dollars. Investors believe that this announcement may increase the tendency to withdraw money from the bank. As a result, on Friday, the US banking sector regulator shut down Silicon Valley Bank. All the deposit liabilities of banks are now in the hands of the regulatory body.
Western media, including Reuters, said that this is the first time a Western bank has closed in this way since the 2008 financial crisis. Not only that, it is the second-largest bank failure in US history. This is due to none other than the consistent increase in policy interest rates by the US central bank, the Federal Reserve. So far, its impact has been largely limited to inflation.
The point is, the Fed’s policy rate was close to zero at the start of last year. But the Fed has raised policy rates eight times in the past year to counter the inflationary effects of Russia and Ukraine. As a result, the interest rate on commercial loans has also increased. In this situation, the interest rate on that country’s bonds has increased. The combined effect of higher interest rates on loans and bonds is that investors are more likely to avoid risk and invest in safer places. That is, investors are thinking that instead of investing in risky commercial projects, it is better to invest in bonds, and they can easily eat the interest.
Startup companies have been the most affected in this regard. As investors cut back on startups, these Silicon Valley startups began to eat away at Silicon Valley Bank and other banks. It puts a strain on Silicon Valley’s bank deposits.
Ben S. Bernanke, the former chairman of the Federal Reserve Bank of the United States, Douglas W. Diamond, a professor at the University of Chicago, and Philip H. Dybvig, a professor at the University of Washington, received the Nobel Prize in Economics last year for researching the banking and financial sector crisis.
The worst economic crisis in modern history was the Great Depression of the 1930s. Nobel Laureate Ben Bernanke has researched that crisis. He showed that the economic crisis of the 1930s deepened and lasted as large numbers of depositors withdrew money from banks together (bank runs).
Bernanke said that SVB is a great example of a bank that can collapse just because of rumours. When a large number of savers go to the bank to break their savings together, the rumor becomes practically real. The government can play the role of rescuer to avoid this dangerous situation. That is the government acting as an emergency banker for banks by insuring deposits.
