SVB Collapse: What Happens Next

 

The recent Silicon Valley Bank collapse is considered to be one of the biggest falls in US history for a financial institution. Everything surrounding it makes it seem, at least in retrospect, that this downturn was inevitable. Now, with the whole thing that already happened a lot of questions can be asked.

 

For starters, how exactly did this fall come about and how did it play out? Also, what does this ultimately lead to? If those questions plague your mind, then you are in the right place, because this read delves deeply into SVB and what led to its current state. The US experienced the failure of major banks that had significant exposure to the tech and cryptocurrency niches. Additionally, this led to large interbank flows of funds in an attempt to shore up bank balance sheets, and many analysts were reporting on a potential U.S. banking crisis, including the slowdown in many sectors. Let’s check more details and see the influences on the stock market!

 

Contents:

- How could this occur?

- What were the effects?

- What follows after?

- A crisis averted

- The new loans

- The future of taxpayers

- Is a stock market crash about to happen?

- Final thoughts

How could this occur?

Bank collapses are incredibly common both globally and locally, especially within the last twenty or so years. The reasons for their fall from grace are also pretty much the same thing, which is the case of the bank in question.

 

In short, SVB's closure was due to excessive withdrawals from the deposits made, which led to immediate losses and eventual collapse. A more detailed recounting of events will talk about how, after impressive growth over the last three years, inflation led to an increase in interest rates. After this, the playing out of events was as follows:

- The growth of the bank resulted in the majority of the money being spent on treasury bonds and the minority kept as cash;

- The Fed's increase in interest rates made such investments risky and therefore less valuable;

- Silicon Valley's tech-based nature meant that most clients were in the world and faced financial difficulty, which led to mass withdrawals;

- To accommodate said withdrawals, SVB had to sell its investments, losing money in the process, leading to its inevitable end.

What were the effects?

The scale of this collapse was so big, that it has been compared to the fall of Lehman Brothers Incorporated fifteen years ago. The official end began with the Feds almost immediately taking over and initially trying to sell the bank, but ultimately failing. This led to them bringing in the FDIC to act as an intermediary as well as to help insured clients of the deposed bank so they could get their money.

 

For this to be accomplished each account had a limit of about a quarter million dollars insured by the FDIC and all that money would return to the depositor. Those with more in their accounts would, unfortunately, forfeit their wealth, and considering the bank in question, that meant most people incurred significant losses.

 

This was until the Federal Reserve decided to intervene, giving hope to those who deposited their money here. This was done as a preventative measure against the spread of bad debt, which had the potential to cause another 2008 scenario.

 

Investors, on the other hand, weren't given the same hope. The nature of this manner of action is such that assets aren't as secure from such a collapse. As such, they are unlikely to have their money reimbursed. Sure, the SVB collapse leaves a lot of uncertainty, but by analyzing and forecasting economic indicators in stock market analysis, you can get a better sense of what may happen next.

 

What follows after?

There are many ways of looking at the whole situation, especially in retrospect. This viewpoint also gives one a future perspective. Some key things include:

 

A crisis averted

The aforementioned similarity to the 2008 collapse is one that the Federal Reserve took note of immediately. As such, they took action almost immediately to avoid the spread of the calamity. 

 

Said action was also necessary because other major banks haven't had it their way, and so the threat of similar mass withdrawals was always present. Because of the measures put in place and quick action taken, many can look at this situation as a major crisis averted.

 

The new loans

That said, additional measures have also been placed upon seeing the state of some operational major banks. This has come in the form of the Bank Term Funding Program, which allows struggling banks to take loans to better allow them to accommodate withdrawals.

 

All financial institutions that have access to this will possess the option for about a year, preventing them from scrapping their assets instead. This gives them ample opportunity to recover, although what happens if they don't is anyone's guess.

 

The future of taxpayers

It's fair to say that the fact that many bank clients will be reimbursed is a major positive. When you consider that taxpayers aren't paying for this, it makes it even more positive. The money instead comes from the FDIC almost in its entirety, which uses what it makes.

 

That's what a shallow view of things will show you, as the effects of bank collapse on the public are present, if minimal and indirect. A separate bank, for example, is going to be charged more for its FDIC affiliation. As a result, bank charges will increase for clients of the other institution.

 

Is a stock market crash about to happen?

Despite those sensational headlines in the newspapers, the recent collapse is unlikely to cause a new financial crisis. Regulators have stepped in to ensure that depositors have access to their funds, making it less likely that the domino effect may occur.

 

It's important to note that Basel III regulations were put in place after the 2008 financial crisis to restrict banks from holding too many long-term assets at once. While most banks in Europe comply with these regulations, only the largest US institutions like Morgan Stanley, Citigroup, and Wells Fargo are subject to them.

 

However, the risk of contagion is low as the aforementioned US banks operate under much stricter regulations that prevent a situation like SVB has faced. As such, the possibility of a stock market crash being triggered by SVB's collapse is highly unlikely in the sector. To navigate better in the niche, it is crucial to understand the main points for stock investing in 2023 and further. Data and statistics can help determine what happens next in the market.

 

Final thoughts

From what you can see, it's pretty clear that many of the issues that plague banks came to a head in SVB. As such, its fall was on its way. Quite a bit of concern was brought up and it was warranted, especially when you consider how similar this collapse was to the one of a decade and a half ago.

 

Fortunately, there were enough key differences that made it so that negative effects from this collapse wouldn't spill out into the national economy. That plus the regulatory measures enacted helped cool minds. The heightened market volatility is still going to be felt, however, which means that uninsured investors would likely lose some cash. So, the risk of a crisis — while certainly not zero — but it is low. The collapse of SVB is unlikely to trigger a stock market crash. But it does highlight the impact of rising interest rates.

 

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