The American Silicon Valley Bank (SVB) went bankrupt at the end of last week and this weekend it became clear that account holders do not have to whistle about their money. US authorities have taken steps to ensure that all of their funds are safe. In recent days, the unrest surrounding SVB has led to falling share prices of banks worldwide. Today, many bank rates went up again.
What kind of bank was Silicon Valley Bank, what happened and is something like this possible here? Four questions about SVB.
1. What kind of sofa was this?
The name says it all, it was a bank for Silicon Valley. That is an area south of San Francisco where all kinds of tech companies and start-ups are active. Start-ups often found it easier to get a loan from SVB than from other banks. Venture capitalists, venture investors in start-ups, also did a lot of business with the bank.
It wasn’t a very big couch, but it wasn’t small either. At the end of last year, it was the 16th largest bank in the US, with assets of $209 billion. That was only 0.91 percent of all bank assets in the US.
2. What went wrong at SVB?
The bank had to take a loss on investments. As a result, account holders got the idea that the bank could get into trouble, began to withdraw their money and the bank actually got into trouble.
See how that went here:
It was a classic bank run. In the Netherlands we still know it from the DSB bank, which went bankrupt in 2009 after a call to withdraw money from there.
A bank goes bankrupt when account holders suddenly withdraw their money en masse. Because the bank cannot suddenly pay out so much money. The money of account holders is largely invested in things that the bank cannot quickly cash in, such as loans and mortgages.
The fact that the poor financial situation at SVB was not noticed earlier may be due to a relaxation of supervision. This was tightened in the US after the credit crisis. However, under President Trump in 2018, those requirements were partly reversed, especially for smaller banks such as SVB.
“Smaller banks of less than USD 250 billion now have a lighter supervisory regime,” says Christiaan van der Kwaak, associate professor of International and Monetary Economics at the University of Groningen. They are now less strictly controlled than large systemic banks.”
3. How did the US authorities react?
Feverish consultations took place over the weekend. Because there was the fear that other banks would also get into trouble. For example, it was speculated that account holders at other smaller banks would also withdraw their money as a precaution. On Sunday, the US Treasury Department, the US central bank (the Fed) and regulator FDIC announced that all bank balances at SVB were guaranteed.
The FDIC is the American deposit guarantee scheme and it actually guarantees an amount of up to $ 250,000 per account holder. But to counter the unrest, all credits are now guaranteed.
Harald Benink, Professor of Banking and Finance at Tilburg University, thinks that the sudden expansion of the deposit guarantee system could lead to perverse incentives. “When push comes to shove, you now see that the government still rescues all account holders of a bank, including those who are not covered by the deposit guarantee. That is an incentive for banks to take more risk and hold less equity. And as a result, problems at banks may become more likely in the future.”
4. How are banks in the Netherlands doing?
De Nederlandsche Bank, the supervisor of banks in the Netherlands, says that they are in good shape. “Our banks in the Netherlands are resilient and can take a beating.”
Banks are regularly subjected to stress tests here. Then we look at what happens to the buffers of banks in all kinds of different economic developments. This may involve rising interest rates, as has indeed happened in recent times. “We noticed in recent stress tests that there are also interest rate scenarios that have an impact on bank balance sheets, but this is manageable and manageable,” said DNB. “Banks are well capitalized and those requirements have also been adjusted after the credit crisis.”
Professor Benink acknowledges that banks’ buffers have improved considerably since the credit crisis. “Capital ratios have gone from about 2 to 3 percent to about 5.5 percent. But historically, that’s still on the lean side.” He argues that capital ratios should be increased further towards 10 to 15 percent.
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