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Analysis- Banking industry stunned by SVB’s lightning strike

BusinessMarketsAnalysis- Banking industry stunned by SVB's lightning strike
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by Pete Schroeder and Nupur Anand

Washington / New York, March 11 (Reuters). , Rapid disclosure of SVB Financial Group SIVB.O has blindsided the banking industry after years of stability.

fall on friday, biggest bank failure Since the 2009 financial crisis, there was a unique set of circumstances but raised questions about hidden vulnerabilities that could have consequences for customers and employees and potentially expose issues at other banks.

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Experts said SVB’s plight could lead to a loss of confidence, tougher regulation and investor skepticism about the financial health of smaller banks, which have been touted as adequately capitalized after regulators forced banks to hold more capital. Was seen in

Sheila Bair, who led the Federal Deposit Insurance Corp. (FDIC) during the global financial crisis, said in an interview that bank watchdogs are now turning their attention to other banks that may have high amounts of uninsured deposits and unrealized losses. There are two factors that contributed to the quick decline of the SVB.

“These banks have a huge amount of institutional uninsured money…it’s going to be hot money that signals trouble,” Bair said.

A sequence of events led to the failure of the SVB, which also included american treasure sale Expectations of higher rates to lock in funding cost, resulting in a loss of $1.8 billion. SVB, which did business as a Silicon Valley bank, also had 89% of its $175 billion in deposits uninsured by the end of 2022. The FDIC insures deposits up to $250,000.

Investors and customers now face a nervous wait to see if SVB Bank finds a buyer soon. During the 2008 financial crisis, Washington Mutual quickly found a buyer. But for IndyMac, in 2009, it took about eight months.

The speed of the SVB crash blinded observers and stunned markets, wiping out more than $100 billion in market value of US banks in two days.

“Banks are opaque, so immediately, we all go ‘Wait a minute, how tied up is this bank to another bank,'” said Mayra Rodríguez Valladares, a financial risk consultant who trains bankers and regulators. “Investors and depositors don’t want to be the last one in the room to turn off the lights, so they have to leave.”

hard rules

Many experts said any ripple effect to the rest of the banking sector could be limited. Larger institutions tend to have more diverse portfolios and deposit clients than SVBs. SVB also had a high degree of dependence on the startup sector.

“We do not believe there is a risk of contagion to the rest of the banking sector,” said David Trainor, CEO of New Constructions.investment researchfirm. “The deposit base of the major banks is much more diversified than that of the SVB and the large banks are in good financial condition.”

Jason Ware, chief investment officer at Albion Financial Group, said exposure to the overall banking system has been limited, but “this situation probably has implications for select regional banks with some direct exposure.”

Other experts said the failure could bolster efforts by US regulators to tighten rules.

The banking sector marched through the COVID-19 pandemic thanks to tougher regulations put in place after 2008. However, during the administration of President Donald Trump, some relaxed the rules,

Some regulatory and industry sources said the easier rules for regional banks are likely to come under greater scrutiny as watchdogs want to ensure they too have enough cushion to weather similar stresses.

Senator Elizabeth Warren, a prominent bank critic, tweeted that the bank’s failure “underscores the need for stronger regulations to protect the financial system.”

One area of ​​particular focus could be large regional banks, which received some rule relief under the Trump administration. US banking regulators said in October they were considering new requirements on large regional banks, including more long-term loans to weather losses.

“It looks like the first place the market is going to look is for regional banks that don’t have loan diversification,” said Greg Hertrich, head of US depository strategy at Nomura.

Industry sources said another requirement that could attract more attention was expanding the one that requires banks to account for the market value of securities held. This requirement currently applies only to banks with more than $250 billion in assets, but could expand to include other firms.

On Monday, FDIC Chairman Martin Gruenberg warned bankers gathered in Washington that firms were facing high levels of unrealized losses, as rapid interest rate hikes eroded the value of long-term securities. .

“The good news about this issue is that banks are generally in a strong financial position… On the other hand, unrealized losses undermine a bank’s future ability to meet unexpected liquidity needs,” Gruenberg said. Said, three days ago SVB announced the need to raise funds.

Silicon Valley bank collapse triggered by threat of downgrade – sources

Newsmaker- Who is Greg Baker, the head of the failed Silicon Valley bank?

Explainer – What were the reasons for the failure of Silicon Valley Bank?

(Additional reporting by Noel Randwich in Oakland, California; Writing by Megan Davis and Lannan Nguyen in New York; Editing by Shree Navaratnam)

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The views and opinions expressed here are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.



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