Suddenly everything happened very quickly: Within a few days, the Silicon Valley Bank (SVB) lost the confidence of investors and customers, on Friday the US deposit insurance company FDIC took control and closed the bank. The shock waves reached as far as Germany. Is a new global financial crisis like the one in 2008 looming? Experts have not yet seen this danger.
What did Silicon Valley Bank do?
The institute, which has been active since 1983, has developed over the years into the "house bank of the tech industry". The SVB financed young up-and-coming companies, and the boom in the start-up scene made the bank one of the largest banks in the USA. According to media reports, start-ups from Germany were also among the customers. According to the FDIC, the California-headquartered bank had $209 billion in assets under management and about $175.4 billion in customer deposits at the end of December. With a balance sheet total of around 200 billion euros, the SVB is "as big as a German state bank, but only a tenth as big as the largest US bank, JP Morgan", classified the "Süddeutsche Zeitung".
Why did the bank get into trouble?
To put it bluntly, one could say that the SVB had too much money and invested it unfavorably. The bank invested in US Treasuries and long-dated real estate-backed securities during periods of low interest rates. But then the US Federal Reserve increased interest rates rapidly in the fight against high inflation. Many securities that the SVB had acquired during the low-interest phase lost significantly in value. At the same time, the SVB was forced to offer investors higher interest rates to keep them from withdrawing their funds. With the sale of bonds, the SVB recently made a loss of 1.8 billion dollars. The attempt to collect fresh money from investors by issuing new shares caused further uncertainty. On Thursday alone, SVB shares on Wall Street collapsed by a good 60 percent.
Is Silicon Valley Bank active in Germany?
Silicon Valley Bank has had a branch in Germany since May 30, 2018 and operates lending business from Frankfurt/Main. On Monday, the financial regulator Bafin closed the Silicon Valley Bank Germany Branch to customers with immediate effect and issued a ban on sales and payments. At the same time, Bafin said: "The plight of the Silicon Valley Bank Germany Branch does not pose a threat to financial stability."
The Bundesbank responded to media reports that the central bank's crisis management team on Monday dealt with the possible effects of the collapse of the SVB in the USA on the German financial market with a written statement: "As part of its financial stability mandate, it is part of the Bundesbank's ongoing work, current Observing market developments and analyzing their effects on the financial system. The Bundesbank works closely with the Federal Ministry of Finance and the Federal Financial Supervisory Authority."
Is a global financial crisis like the one in 2008 looming?
Experts currently consider this unlikely. The problems of the SVB and other financial institutions bring back memories of the collapse of the investment bank Lehman Brothers, which is believed to have triggered the global financial crisis about 15 years ago. However, there are important differences: the SVB is not a small institution, but it ranks 16th among all US banks in terms of total assets. However, the SVB is nowhere near as big as Lehman was in 2008. In addition, SVB is a money house specializing in venture capital and start-ups in the technology sector, while Lehman's importance to the financial system was much greater.
In addition, since the financial crisis, numerous security measures have been adopted to prevent the events of that time from happening again. "Politics, central banks and financial market participants have learned," explains Commerzbank expert Ulrich Leuchtmann. In particular, instruments exist today to contain such crises, which only had to be created after 2008. "And because they didn't exist back then, the contagion effects were higher than they should be today," adds Leuchtmann.
The future president of the Kiel Institute for the World Economy (IfW), Moritz Schularick, advises the "Süddeutsche Zeitung" (Monday) to be vigilant in view of the historic "interest rate shock": "By now it is clear to everyone: In the financial system, because of The rising interest rates mean enormous losses, especially with long-term bonds and real estate loans. Some banks can sit it out. It gets tricky when customers can withdraw their money at short notice. Then the losses can be so high that the bank becomes insolvent, as in America happen."
What's next for Silicon Valley Bank?
In the USA, the government announced that all deposits with the money house would be protected. Treasury Secretary Janet Yellen, Federal Reserve Chair Jerome Powell and the US deposit insurance company FDIC announced in a joint statement on Sunday evening (local time) that all depositors would be fully protected and would be able to access all their money from Monday: "The taxpayer will not suffer any losses related to the liquidation of the Silicon Valley Bank."
US President Joe Biden reiterated on Monday: "Americans can rest assured that the banking system is secure." Customers who had invested their money with Silicon Valley Bank and Signature Bank, which were closed over the weekend, are protected and have access to their savings. The investors behind the banks, on the other hand, would have to bear their losses themselves. In addition, the managers of the financial institutions placed under state control would be fired, announced Biden.
The British subsidiary has meanwhile been taken over by the major bank HSBC. The British government said on Monday morning that the transaction had been "facilitated by the Bank of England in consultation with the Treasury". "No tax money is involved and customer deposits have been protected," it said in London.
How are the financial markets reacting?
Already in the past week, the prices of bank stocks - including German institutes - fell significantly. On Monday morning, the stock exchanges in Europe went down again. The dollar came under pressure and capital market interest rates fell.
How are politicians reacting?
Federal Finance Minister Christian Lindner does not see the stability of the European financial system at risk as a result of the imbalance. "We see that the American government and financial institutions have acted decisively," said the FDP politician in Brussels before a meeting with the finance ministers of the euro countries. There are their own authorities in Europe, for example the financial supervisory authority in Germany, which are constantly monitoring the situation. "These institutions left no doubt about the stability."
EU Economic Commissioner Paolo Gentiloni said he saw no particular danger. Of course, the EU Commission is monitoring the situation in close contact with the European Central Bank. All European banks, not just the largest, comply with relevant regulations, so there is no direct impact. "The possibility of an indirect impact is something we need to monitor, but at the moment we don't see that as a significant risk."
Is the Fed now deviating from its course?
Since spring 2022, the Fed has increased interest rates in the US by 4.5 percentage points. Sharply rising interest rates also have side effects, as the SVB case now shows. This fundamental problem, which can also affect other financial institutions, should give the Fed food for thought. On the other hand, the Fed launched a new lending program over the weekend that banks can use to obtain fresh money on favorable terms. So the central bank initially seems to want to take a different approach than changing its interest rate. Effects on the next interest rate meeting, which will take place in just over a week, are nevertheless conceivable: The US bank Goldman Sachs, for example, expects an interest rate pause in view of the uncertainty in the banking sector. In the months that follow, however, the Fed will continue its tightening course, the analysts write.