Updated: Nov 22
Author: Aslı Turkmen
Date of Publication: 05/04/2023
Silicon Valley bank fall caused a major earthquake. In particular, it was no ordinary bank.
Contrary to other commercial banks, this California bank sought to make the deposits of the wealthy profitable in the long run.
How did the shocking collapse happen?
We should not lose sight of the fact that since 2010 the Federal Reserve of the United States has significantly lowered interest rates. In particular, venture capitalists, not knowing what to do with all this money, invested it with great risk in companies founded with innovative business ventures connected with last technologies. It is never certain that these innovative ideas will succeed, and there is always the possibility that they will fail.
Silicon Valley Bank Cash Influx
Due to the concentration of these internet businesses' bank accounts in Silicon Valley, this bank has been inundated with cash. But, there was a risk associated with this safe investment: an increase in interest rates. It is seen that the market value of any bond is inversely proportional to the interest rate.
Therefore, as the interest rate increases, the market value of the bond decreases. Still, the Bank of Silicon Valley has not acted to prevent it, even though it carries significant risks that keep the fixed-income market dependent. Around 90 billion bonds, or the majority of the bond portfolio, were not covered.
What is the Fed going to do?
The US Federal Reserve would now be evaluating its decision to hold off on raising interest rates. The next week, it was anticipated that he would push them once more for an added quarter point, up to five round scores.
The shock at Silicon Valley Bank didn't just subside after Biden said ''whatever it takes to
avoid influencing other countries''. However, it fell significantly on Monday: Western Alliance Bancorp had a 75% decline in value.
We no longer anticipate that rate hike to occur at its upcoming meeting on March 22. Actually, this is due to the strain in the financial system, the US bank stated. When the storm has passed and rate increases resume or slow in ''May, June, and July'', it will be significantly effective to monitor.
The European Central Bank
When it comes to its monetary measures to combat inflation, the ECB has displayed a more cautious attitude than its US equivalent. This Thursday, the ECB will meet, one week before the Federal Reserve. Hence, you'll need to weigh your options. One is to hike interest rates notwithstanding the banking shock on the opposite side of the pool.
Is there any cause for concern?
The effect of the rate increase on banks, companies, and the economy is being evaluated by analysts and economists. According to DWS, the biggest asset management in Germany, “the insolvency of a bank” isn’t limited to the bank and its shareholders. Actually, it can spread to the larger industry and economy.
Still, neither the German executive nor other experts see similarities with the great financial crisis of 2008. Compared to the enormous size of the US real estate market, few companies could be affected, they say. In addition, banks are in a much stronger position in terms of financing and supervision than before the financial crisis. In fact, this is thanks to solvency protocols such as Basel III.
How will it affect mortgages?
The delay in interest rate rises will provide some relief for variable-rate mortgages, which are the majority in Spain. Since the majority of loans are based on Euribor, any increase in interest rates will result in an increase in your company's monthly cost of debt. Euribor will cost 1,500 euros as a result of the most recent rate increase. an increase of 3,600 euros per year for a mortgage that will be repaid over 25 years.
Mortgage growth will therefore be frozen if the interest rate increases stop, at least until
central banks change their approach. Due to Trump's banking reform in 2018, careless management practices went unnoticed until interest rates rose. As a result of this shock, the only thing we understand with certainty is that financial control has reverted to its old ways.
Once again demonstrating the importance of how careful public authorities should be
about risky banking practices in order to prevent further disasters.