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The last few months have been marked by high-interest rates and many uncertainties regarding the global economic scenario. The recent bankruptcy of two large American banks has increased tension and the expectation of a possible recession of worldwide proportions.

The bankruptcy of Silicon Valley Bank (SVB) and Signature Bank is for many one of the expected symptoms of an inevitable crisis. But it is necessary to understand what happened in order to assess the possible impact on the activities of other banking institutions.

The startup’s bank

Located in the Silicon Valley region of California, SVB was one of the leading institutions providing credit to startups and technology companies. It was considered the 16th largest US bank by the Fed (the US central bank) and in 2021 it declared that Silicon Valley Bank was the main financial institution for 50% of venture startups in the US.

According to Alexandre Cancherini in an interview with InfoMoney, the SVB had a large fundraising through deposits. And according to the expert, the response of a bank when there is a lot of liquidity is to give loans and invest in securities.

But as the Covid-19 pandemic slows down investments in many areas, and therefore on credit applications, the bank directed its management to buying bonds. Now, with the increase in interest rates, investors that used to make large deposits are now making large withdrawals.

Cancherini explains that in order to cover the turnover, Silicon Valley Bank was forced to sell many bonds with low returns. In this way, the deficit that led to its bankruptcy was formed. The same phenomenon of bankruptcy was repeated with Signature Bank, which suffered the same fate.

A cascading effect with the potential to worsen the crisis

Two major bank failures in such a short time and in an unstable economic environment could trigger a cascading effect that worsens the situation in the markets. With the insecurity in the economic scenario, clients from banks all over the world have started a process of withdrawing their accounts and investments.

A possible massive movement of flight from the banking institutions would inevitably result in the bankruptcy of more banks, causing an implacable domino effect on the global economy. Not surprisingly, President Biden has spoken out on the matter, stating categorically that the deposits of US bank customers are safe.

As Biden put it: ‘The American people can trust that the banking system is safe. Your deposits will be there when you need them.”

In an effort to restore investor confidence in the American banking system, Biden indirectly referred to some of the safety measures implemented following the recession caused by the American housing bubble.

The lessons learned from the 2008 Subprime Crisis

The 2008 housing bubble in the US, known as the Subprime Crisis, impacted countries across the world and had severe consequences for the US, which in 2012 still had a public debt of 103% of its GDP. Therefore, during the recovery the country instituted a series of actions to protect banks, customers, and investors, such as:

In summary, the American system is prepared with numerous instruments to prevent the spread of a crisis throughout its entire banking system. Hence Biden’s request that investors maintain confidence and not withdraw their assets from their banking institutions.

One of the moves that confirm the availability of instruments to prevent further bank failures was the injection of about 30 billion in resources into First Republic Bank. The bailout was provided by a group of 11 US banks, which issued a statement informing that the action reflected the confidence of the institutions in the American banking system.

On the same path, but on another continent, Credit Suisse received support that could reach 50 billion Swiss francs (equivalent to more than 53 billion dollars). The bankruptcy of the institution culminated in its sale, the result of which will be the formation of the largest banking conglomerate in Europe since the Subprime Crisis.

Assuming the scenario stabilizes, and investors keep their assets in the banks where they are deposited, the expectation is that the bankruptcy of Silicon Valley Bank, Signature Bank, and the injection of funds into other banking institutions should not trigger a global recession. should not trigger a global recession.