- Crisis exposes banking 'vulnerabilities' amid rising rates
- The 16th biggest bank collapses amid high-interest rates
HARARE- Silicon Valley Bank (SVB) is the latest victim of the tight global monetary environment that has persisted since 2022. The bank was ranked as the 16th biggest bank in the U.S. at the end of 2022, with over $200 billion in assets. SVB, a lender best known for financing startups, had faced liquidity concerns in the United States, triggering a bank run last week that led to the bank’s collapse on Friday. Silicon Valley Bank's failure is the largest since Washington Mutual went bust in 2008, a hallmark event that triggered a financial crisis that hobbled the economy for years. The 2008 crash prompted tougher rules in the United States and beyond.
The bank which was heavily exposed to long-term bonds saw losses in its position as bond prices fell due to their inverse relationship with interest rates. As the initial wave of depositors withdrew funds to cover general costs in response to worsening economic environments SVB began to sell off its bonds at discounted rates. After announcing that it intended to raise financing to cover the losses, depositors hurriedly withdrew funds. The client base was composed of big businesses, meaning it only took a relatively few numbers of depositors to withdraw a fatal sum of funds.
With financial media reporting that the fall of SVC exposes banking ‘vulnerabilities’ amid rising interest rates, this has raised concerns about a financial crisis across the US with spillover effects into the global financial market. This is unlikely given that post the 2008 financial crisis, regulators have imposed more stringent capital requirements for U.S. banks aimed at ensuring individual bank collapses won't harm the wider financial system and economy.
However, this will test The Federal Reserve Bank and other central banks’ commitment to maintaining their aggressively tight policy stance. If the environment remains tight, this collapse may be a telling sign of future economic challenges. Start-ups are expected to be the hardest hit. This is because the rise in interest rates is likely to shrink the volume of capital being deployed in VC funds, and ultimately, startups. This is because investors are likely to favor companies with more predictable profits and cashflows over riskier startups and business models.