Written by: George Prior
The collapse of Silicon Valley Bank (SVB) threatened to prompt a wider financial crisis and the authorities had no choice but to roll out emergency measures, says the CEO of one of the world’s largest independent financial advisory, asset management and fintech organizations.
The observation from Nigel Green of deVere Group comes as US regulators said that from Monday the failed bank’s customers will have access to all their deposits, and that they have set up a new facility to give banks access to emergency funds. The Federal Reserve has also taken steps to make it easier for banks to borrow from the central bank in emergencies.
He says there are three key takeaways from the SVB’s collapse.
First, “The authorities will get some stick, especially from the shareholders of SVB investors. The asset value of the bank itself is zero, and there’s no chance of a government bailout for shareholders.
“But the hands of the Fed, the Treasury and regulators, were forced into taking action in order to break the doom loop hitting the banking sector.
“A failure to act would have to be a dereliction of duty. If they hadn’t given customers access to their deposits from Monday, it would have resulted in a loss of confidence in the banking system, leading to a ‘run on the banks’ which, in turn, would have caused a liquidity crisis in the banking and broader financial system, potentially triggering a full-blown global financial crisis. The authorities couldn’t let this happen,” he explains.
Second, “It brings into question the Trump-era deregulation of banks. The decision to roll back Dodd-Frank's ‘too big to fail’ rules, reducing both oversight and capital requirements, seems to have contributed to SVB’s collapse.
“It appears that the deregulation has allowed banks like SVB to take reckless risks. Now there needs to be a serious conversation about reversing the law to shore-up confidence and to avoid further collapses.”
Third, “It is now doubtful that the Fed will continue with its plan for aggressive interest rate hikes. The next hike was widely expected on March 22 following robust jobs data in January and February.
“We expect the stress in the banking sector, and the wider impact on confidence, now will give the central bank cause for pause on its rate hike program.
“Many will be asking: Was SVB – a major source of funding for US tech start-ups - the first high profile victim of the Fed’s higher interest rates agenda?
The deVere CEO concludes: “The situation is moving quickly and despite the action taken by authorities, it isn’t over yet.
“Amongst other issues, there remain fears about contagion and there are real concerns that startups may be unable to pay their bills and salaries in coming days, venture investors may now find it hard to raise funds, and an already-pummelled sector could face a long rout.”
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