The past few days have seen a dramatic decline in Asian shares, with fears over the health of global financial markets deepening. This comes after the collapse of both Signature Bank and Silicon Valley Bank, which are the worst bank failures since the 2008 global financial crisis.
The collapse of these banks has taken its toll on the markets, with Tokyo stocks closing down two percent, despite reassurances from U.S President Joe Biden. While EU authorities say they are monitoring the situation, they do not expect the U.S failures to cause long-term problems in Europe. Germany’s Christian Lindner, for example, expressed his confidence in Germany’s own financial regulatory body, which is continually monitoring the situation.
Biden’s Response to Recent Bank Failures: Strengthening American Financial Institutions
In the U.S, however, the failures have brought back painful memories of the devastating meltdown of 2008, and fears of another banking crisis are rising. In response, U.S President Joe Biden has promised to do whatever is needed to strengthen American financial institutions and has assured Americans that their banking system is safe.
Biden stressed that unlike in the past, irresponsible behavior by banking executives would not be tolerated, and the management of these banks will be fired if the bank is taken over by FDIC. He also plans to ask Congress and the banking regulators to strengthen the rules for banks to make it less likely that this kind of bank failure would happen again.
These rules were introduced after U.S banks brought on the global financial crisis in 2008 by aggressive mortgage lending, but they were partially repealed in 2018 under then-President Donald Trump. In the coming days, that decision is likely to be back in the spotlight.
Silicon Valley Bank Seized: Practical Implications and Hope for the Future
So, where does the situation now with Silicon Valley Bank stand after Biden’s speech yesterday? From a practical standpoint, depositors have started to withdraw their funds through a bridge bank established by the US government. However, it’s a bit of a mess right now, with reports that people had to try thousands of times before they were able to get funds. Mostly, these depositors are taking out funds to pay their employees, as they were unable to do that last week.
Up to 5,000 tech startups were depositors into Silicon Valley Bank, so this is a significant issue. However, President Biden’s promises are happening, and people are actually able to withdraw those funds. Eventually, everyone will be made whole regarding the banks.
The banks are now officially seized, and they will cease operations. The management will be fired, so they sort of cease to exist. Their funds will be deceased, and there will be used to recapitalize the investment. The big hope is that this will provide an injection of confidence that will prevent another banking crisis like the one that we saw in 2008.
The fear of another banking crisis is prevalent, but the U.S administration was pretty quick to work over the weekend with measures that seemed to work to appease depositors. It was a big political stance here that was way different from what we saw in 2008. They stressed that this is not a bailout of investors in the banks. Investors will pay the cost for this mess, as they took a risk. Biden said this is capitalism, and capitalism risks can sometimes not pay out. So, it’s not a bailout of investors; the depositors will be protected.
The Key Differences Between the 2022 Banking Crisis and 2008 Financial Crisis
What’s also very different is that what we’re seeing is not banks selling toxic derivatives to the entire global system in a scheme that was overlooked for too long. Now, this is a case of appalling mismanagement and appalling risk management, especially from Silicon Valley Banks and other banks that took too many risks on long-term interest-related products.
Another key difference between the current situation and the 2008 financial crisis is the response of the government and financial institutions. In 2008, many financial institutions were deemed “too big to fail” and were bailed out with taxpayer money. This led to widespread public outrage and calls for reform of the financial system.
In contrast, the response to the recent bank failures has been focused on protecting depositors and preventing the collapse of the wider financial system. President Biden has emphasized that the management of the failed banks will be held accountable for their actions and that regulations will be strengthened to prevent similar failures in the future. This approach is likely to be more palatable to the public and may help restore trust in the financial system.
The current situation also highlights the importance of diversification and risk management in the financial industry. Both Signature Bank and Silicon Valley Bank were heavily invested in risky assets, such as cryptocurrencies and long-term interest-related products. This left them vulnerable to sudden shifts in the market and ultimately led to their collapse. Financial institutions that maintain a diversified portfolio and manage risk effectively are more likely to weather crises and avoid catastrophic failure.
In conclusion, the recent bank failures have raised concerns about the stability of the global financial system and the need for stronger regulations and risk management in the financial industry. However, the response of governments and financial institutions has been focused on protecting depositors and preventing wider economic fallout, which may help restore public trust in the financial system. The situation also underscores the importance of diversification and risk management in the financial industry, as institutions that take on excessive risk are more vulnerable to sudden market shifts and catastrophic failure.
The entire system is broken. No idea how we replace it, but that has to be the focus of all governments in the short-term.
You are missing the fact that USA federal reserve interest rate hikes contributed to bank failures.