U.S. Banking System On The Brink
Sheldon Filger-blogger for GlobalEconomicCrisis.com
The collapse of SVB (Silicon Valley Bank) has sent shock waves throughout the financial world. It has also aroused a morbid sense of deja vu harkening back to 2008, when the global banking system seized up, leading to the Global Financial Crisis. With 175 billion dollars on deposit as of December 2022, SVB was the largest regional bank in Silicon Valley, playing an important role in financing the hi-tech sector.
The highly speculative model employed by SVB (high level of unrealized losses accentuated by Fed rate hikes)) led to its failure, being forced to close after a run on deposits. Unable to engineer a quick sale of SVB, the Biden administration, in a fit of panic which may be justified, took extraordinary measures. About 85 percent of deposits at SVB were not insured by FDIC, which has a cap of $250,000 . The Treasury Department decided to ignore the cap and guarantee that all deposits at the failed bank would be covered. It added, as strictly PR, that U.S. taxpayers should not worry, as they would not cover the cost, leading to the question of who will.
The SVB deposit resolution had barely been announced when New York state regulators shut down Signature Bank, which had 80 billion dollars on deposit and was involved in speculative assets, in particular cryptocurrency..
Both these bank failures, occurring withing days of each other, took the financial world by surprise. The risk of contagion is real, explaining why entities such as the U.S. Treasury are taking extraordinary policy measures.
One likely casualty of these bank failures is the war on inflation being waged tardily by the U.S. Federal Reserve. Only days earlier the Fed had convinced the markets that another rate hike of up to fifty basis points was on the way. Now this seems doubtful, and if more bank failures occur the Fed may even go in reverse. This means that in addition to the danger of a banking collapse, an alarming acceleration in inflation is a serious possibility.