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If you have not heard of the recent collapse of the Silicon Valley Bank (SVB) and Credit Suisse Bank (CSB), here is a quick rundown of who they are, what they do and explore the potential impact of their failure on the economy. SVB and CSB are two of the biggest banks in the world, known for their investments in the tech and finance sectors.
Silicon Valley Bank and Its Importance to the Tech Industry
Silicon Valley Bank is a bank that primarily serves the technology industry. It provides banking services to many tech startups, venture capitalists, and private equity firms such as Roku, Etsy, BuzzFeed, Roblux, and more. The bank is known for its expertise in the tech industry and has been a vital player in the growth of many successful startups.
If Silicon Valley Bank were to fail, it could have a devastating effect not only on the tech industry but the world’s entire economic infrastructure as the tech industry has become a significant driver of economic growth in recent years. Many startups may lose their funding, and venture capitalists may lose their investments.
Like SVB, Credit Suisse Bank is a major player in the financial industry, providing banking services to individuals and businesses worldwide. The bank is known for its expertise in wealth management, investment banking, and asset management, among others.
If Credit Suisse Bank were to fail, it could have a significant impact on the financial industry. Many individuals and businesses would lose their investments and savings, leading to a decrease in confidence in the financial system. The failure of Credit Suisse Bank could also lead to a significant decrease in the value of the Swiss franc, which could have a ripple effect on the global economy.
And so they did but why?
In the case of SVB, according to Federal Reserve Vice Chair of Supervision Michael Barr, “SVB failed because the bank’s management did not effectively manage its interest rate and liquidity risk, and the bank then suffered a devastating and unexpected run by its uninsured depositors in a period of less than 24 hours,”. Such mismanagement can be seen in the report of CNN Business
- Due to the rapid growth of the company which did not run parallel to the risk management capacity and the bank’s compliance systems
- 97% of SVB’s deposits were uninsured
- Lack of leadership in the appointment of the Chief Risk Officer (CRO), who “would have been able to spot the growing risk posed by the dwindling value of the bank’s long-dated bonds, which combined with its outsize deposit risk would merit a course correction.”
As for Credit Suisse, based on reports by Reuters, while a case of mismanagement can also be attributed to its failure, the collapse is largely down to investors losing confidence. Credit Suisse confirmed in February that clients had pulled 110 billion Swiss francs ($119 billion) of funds in the fourth quarter while the bank suffered its biggest annual loss of 7.29 billion Swiss francs since the financial crisis. The bank has lost more than 75% of its value over the past twelve months. This caused customers to lose confidence in the bank, as shares continued to slump.
The Interconnectedness of Banks
The failure of a large bank like Silicon Valley Bank or Credit Suisse Bank could have a domino effect on other banks. Banks are interconnected, meaning that the failure of one bank could lead to the failure of others. This interconnectedness could lead to a systemic crisis in the financial system.
During the 2008 financial crisis, the failure of Lehman Brothers had a significant impact on the global financial system, leading to the failure of other banks and the global economy. In the event of a bank failure, governments often intervene to prevent a systemic crisis. Governments may provide financial support to the failing bank or take over the bank altogether.
Government intervention could have a positive impact by stabilizing the financial system and preventing a systemic crisis. However, it could also have a negative impact by increasing government debt and decreasing confidence in the financial system.
Which is exactly what happened!
The Federal Deposit Insurance Corporation (FDIC) estimates the cost to the Deposit Insurance Fund to cover the collapse of Silicon Valley Bank to be $20 billion — including $18 billion to cover uninsured deposits, And the failure of Signature Bank is likely to require about $2.5 billion, including $1.6 billion to cover its uninsured deposits. a large portion of Signature Bank was sold to Flagstar Bank, and SVB has been sold to First Citizens Bank. This was testified by FDIC Chair Martin Gruenberg and Treasury Under Secretary for Domestic Finance Nellie Liang as part of an effort to stabilize the situation and reassure confidence in the U.S. banking system as reported by CBS.
What are the long-term impacts?
Employment: The failure of Silicon Valley Bank or Credit Suisse Bank could have a significant impact on employment. The tech industry and financial industry are major employers, and the failure of these banks could lead to a decrease in job opportunities. The failure of Silicon Valley Bank or Credit Suisse Bank could also lead to a decrease in innovation and entrepreneurship, leading to a long-term impact on employment opportunities.
Investors: The failure of Silicon Valley Bank or Credit Suisse Bank could have a significant impact on investors. Many individuals and businesses have investments in these banks, and the failure of these banks could lead to a significant loss of wealth. The impact on investors could lead to a decrease in confidence in the financial system, leading to a decrease in investments and economic growth. The impact on investors could also lead to a decrease in consumer spending, leading to a slowdown in the economy.
The failure of Silicon Valley Bank or Credit Suisse Bank could have a significant impact on the economy, especially in the tech and financial sectors. The failure of these banks could lead to a decrease in innovation, job opportunities, and economic growth. The U.S Government intervene to prevent a systemic crisis, but this could lead to a negative impact on government debt and confidence in the financial system.
It is vital to stay informed about the financial industry and advocate for increased regulation to prevent future bank failures. An increase in the regulation of the financial industry can prevent future bank failures. It could lead to a more stable financial system and prevent a systemic crisis in the future. By staying informed and taking action, you can help create a more stable and prosperous economy for future generations.