Four days that shook the US banking system
Agency Report
The United States banking system has been gripped in recent days by a series of convulsions that has seen the collapse of three banks and authorities undertaking extraordinary measures to reassure depositors.
It all began Wednesday night with a liquidation announcement from the small regional Silvergate Bank, a favourite among the cryptocurrency crowd.
The California business was swept up in several crypto mishaps, particularly the implosion of exchange platform FTX, before facing a wave of sudden withdrawals.
Later that same night, medium-sized institution Silicon Valley Bank announced it was facing a huge run of unexpected withdrawals.
SVB, a key lender to start-ups across the United States since the 1980s and the country’s 16th-largest bank by assets, had been hit by the tech sector slowdown as cash-hungry companies rushed to get their hands on their money.
SVB — along with other banks — was also dealing with the effects of the Federal Reserve’s policy U-turn as the US central bank has moved aggressively over the last year to counter inflation by hiking interest rates.
Banks typically borrow money under short-term instruments while loaning using long-term vehicles.
Ordinarily, this dynamic is beneficial because interest rates on long-term instruments are higher than those on short-term bonds.
But because of the volatility unleashed by the Fed’s policy pivot, there has been an “inversion” of the bond yield curve.
– Run on deposits –
The extent of SVB’s trouble emerged in a presentation last Wednesday.
While the bank emphasized the strength of its balance sheet and the relatively low proportion of its loans compared to its deposits, it also announced a capital increase of $2.25 billion and revealed that after an emergency sale of a portfolio of financial securities worth $21 billion it still came out with a loss of $1.8 billion.
The announcement spooked investors and clients, and sparked a run on deposits.
On Thursday alone, the SVB saw an estimated $42 billion of withdrawal orders.
It was not able to honour all those requests, and posted a negative cash position of nearly $1 billion by the end of the day.
