after bankruptcy Silicon Valley Bank (SVB) and Signature Bank, the question is, with the consequences for the markets, is it comparable to the decline? Lehman Brothers triggered in 2008 Worst financial crisis since the ‘crash’ of 1929. Analysts do not see that these are similar situations. unnecessary mortgages; and another in a niche bank between a US with a more erratic financial sector than in Europe. But financial crises can have unforeseen side effects.
1. Are the conditions the same as in 2008?
before falling Lehman Brothers (Actually not what a bank understands, but more like what a European securities company is) In 2008, there were some warnings and signs from a year ago, like other banks going bankrupt. But the real face and rate of that crisis started with the public intervention of the agencies. Freddie Mac and Fannie Mae The bailout of Bear Stearns investment bank, which controlled half of the US mortgage market, was later sold at a bargain price to JP Morgan Chase. Events accelerated with the bankruptcy of Lehman Brothers, which Washington decided not to bail out; Bank of America bought Merril Lynch, another investment banking giant, and injected public capital into insurance giant American International Group (AIG). The US Congress ultimately approved the injection of approximately $700,000 million into the system under George Bush’s mandate at the White House to ‘eat’ Wall Street’s bad debt in exchange for capitalizing on assets. they refunded the money. This resulted in a phase risk slicing it has infected the entire world financial system through asset packages that hide insignificant values with a good credit rating seal.
2. Is the source of the SVB’s decline the same?
In 2008, the problem was that the bubble burst. primary mortgage, through institutions that forget risk control when packing and selling mortgage risk and lending to home purchases to groups that some authors are interested in, such as professor emeritus. Leopoldo Abadiacoined the term ‘ninja’ from the other side of the Atlantic: ‘no income’, ‘no job’, ‘no wealth’ (no income, no employment, no wealth). Encouraged by voluminous commissions as more asset packages are valued, risk rating agencies endorsed toxic-laden assets.
Now it’s a problem SVB strategy, a somewhat diversified and very niche bank (specializes in the technological sector and ‘startups’), to allocate customers’ deposits to purchases of long-term public debt—primarily US Treasury bonds—that have fallen in value since the Federal Reserve began raising interest rates. And the inverse relationship between price and profitability in fixed income is that if interest rates go up, price goes down and vice versa. Bonds on the balance sheets of this and other companies lose value as prices fall as they are purchased at higher prices. However, these losses will not occur if they do not occur. And that’s what happened to SVB, which had to get rid of those titles to stop withdrawing large deposits from its clients due to reputational issues. Rumors spread by venture capital firms that the SVB’s balance sheet was not true led to the stampede that swept the organization. In the end, regulators chose to close the bank and cover customer deposits mostly linked to the tech sector. Fed officials analyze what went wrong and guarantee deposits as more than 90% go wrong. Experts confirm that the fiasco was the result of regulatory laxity for midsize and regional banks headed by Donald Triump, which prevented early detection of the SVB’s problems and also interfered with Signature Bank. The goal now is to stop a general contagion affecting midsize assets in the US for the time being.
3. What is fear now?
It is too early to determine the extent of contamination, but in the financial sector there are fears that banks around the world, including Spain, have taken up large amounts of public debt in recent years, trying to maintain a conservative policy that is precisely different from this. 2008. And all this transferred the country risk to their balance sheets. If they had trust issues, they would have no choice but to impersonate the SVB: raise capital and sell assets, including depreciated bonds. This is where insecurity is born. In any case, in Spanish banking, 77% of the public debt portfolio is held to maturityAlantra Equities explains in a report that this is what happened to the US bank, which is very different from when it was ready for sale, which would result in losses. Eurozone officials and Nadia Calviño, vice president and economy minister, also quickly ruled out any contagion and emphasized the strength and solvency of continental banks. In any case, the analysts explain, the possibilities of contagion depend on the size and duration of the crisis in the US.
4. Will the Fed and the ECB have to change their strategies?
One of the big unknowns is to what extent this earthquake will interrupt the Federal Reserve and the European Central Bank (ECB) to reconsider their strategies and tighten monetary policy to fight inflation. In the eurozone example, analysts are not so clear that the European Central Bank should change its anti-inflation policy, meaning that European and Spanish banks have to keep raising interest rates because they have a high level of liquidity achieved by the open bar policy. to cope with the effects of the pandemic. This variable, for example, is the one that gives them little incentive to increase the yield on deposits, despite the rise in interest rates making variable rate mortgages more expensive.