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Unprecedented Bank Collapse in the United States
- Thrive Finance
- Mar 22, 2023
- 2 min read
Recently, the business and finance sector has taken a substantial hit as two banks shut down in the United States within the same week. More specially, the downfall of the Silicon Valley Bank (SVB) and Signature Bank is viewed as major failures in the banking industry since the last decade. Furthermore, these banks also had connections with the technology industry, which has been struggling for some time now. Instances such as these can give insight into inflation, stock market trends, and an outlook on the global economy.
Why did the SVB Crash?
As stated previously, SVB was a major tech-lender bank. Hence, it is interesting to understand what led to its collapse. According to business analysts, some of the primary reasons would include Trump-era rollbacks, the bank’s overall management, and the rise in inflation and interest rates. To understand this situation, it is vital to note that during the Trump presidency, there was legislation that created rollbacks for credit requirements implemented during the Dodd-Frank banking legislation, which was put into action after the 2008 banking crisis. The Dodd-Frank banking legislation was established for banks with $50 billion in assets to go through an annual Federal Reserve examination and maintain specific capital levels. At the same time, SVB did not have a chief risk officer throughout 2022.
SVB’s Interest and Inflation Response
As you may have already noticed while shipping, prices for goods have increased in past years. Due to this, many families, businesses, and banks have had to create strategic plans to avoid collapsing into a financial crisis. However, this situation became inevitable for SVB to dodge due to their offerings of zero interest rates. This triggered an influx of tech investments for decades. Consequently, creating a demand for higher returns and rising inflation rates. To recover from this extensive loss, SVB had to sell some of its bonds. The United States plays an essential global role in banking and business. Globally, banks have been increasing interest rates to counteract the rise in prices. Therefore, a loss such as this was unprecedented.
Global Response:
US President, Joe Biden, reassured people many times that the country’s financial conditions are optimal. However, the collapses of these banks have created a global effect in which bank shares have suffered extreme losses. For example, Germany’s Commerzbank experienced a ten per cent hit to their shares. Due to this, some have shared the perspective that the Federal Reserve will now have to halt plans on driving up interest rates to reduce the effects of inflation. The US government has stepped in to help people and businesses access their money from SVB. But trust among individuals continues to dwindle.
As of now, the situation seems to be under control, and it will be interesting to see how the industry continues to shift and adapt to changes in the economy and market behaviour.
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