How Silicon Valley Bank Raised the Specter of the 2008 Financial Crisis

With $210 billion in assets, Silicon Valley Bank (SVB) was Tom Thumb in the American banking landscape. Far from the 3.2 trillion dollars in assets of JP Morgan, it was indeed only the 16th US bank. But SVB’s flash bankruptcy raised the specter of the 2008 financial crisis, which led to the collapse of Lehman Brothers and triggered an unprecedented wave of global panic. Anxiety reinforced by the disappearance of the banks Silvergate and Signature Bank, two establishments which bet on the ecosystem of cryptocurrencies.

Faced with the fear of massive withdrawals threatening to produce a domino effect, central banks and governments have continued to play the appeasement card in recent days to reassure markets in the midst of a crisis of confidence. However, this did not prevent certain banking groups, particularly in Europe and the United States, from being strongly shaken on the stock market.

Credit Suisse absorbed by its rival UBS

Because these stock market shocks have shaken the giants of global finance by reviving certain fragilities. This is particularly the case of Credit Suisse, plagued for several years by a series of scandals, which plunged into crisis after the refusal of its main shareholder, the Saudi National Bank (SNB), to recapitalize the Swiss bank. In the current context, marked by strong nervousness on the markets, the remarks of the president of the SNB excluding a new injection of capital into Crédit Suisse appeared as a form of disavowal with regard to the banking establishment, engaged in a vast restructuring to reverse a negative financial dynamic.

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Credit Suisse has therefore unscrewed on the stock market, the Swiss authorities having intervened this weekend to play the firefighters on duty. The Swiss government scrambled to orchestrate the bailout, which took the form of a takeover by the country’s number one bank, UBS, for $3 billion. 48 hours before the finalization of negotiations, Credit Suisse was still valued at more than 7 billion euros on the stock market. But the specter of widespread panic was such that Swiss bankers and politicians resolved to act quickly.

While some leaders, such as Christine Lagarde, the boss of the European Central Bank (ECB), or Bruno Le Maire, the French Minister of the Economy, welcomed this express rescue, others nevertheless reacted badly to this news, ‘image of The Tribune of Genevawhich denounces a “redemption from shame”. It must be said that the fall of one of the 30 global banks deemed “systemic” (“too big to fail”) would have clearly cast a cold spell on the markets.

186 American banks in danger?

Admittedly, the spectacular collapse of the Silicon Valley Bank is not the direct cause of the difficulties that led Credit Suisse to its rescue by its rival; however, the affair has plunged the global banking sector into extreme anguish, as the slightest vulnerability could be interpreted as a harbinger of cascading failures. Now markets are praying for a liquidity crunch as interest rates have been raised sharply to counter runaway global inflation.

In addition, the shock wave could be much wider, since 186 American banks exposed to the same vulnerabilities as SVB could suffer the same fate, according to a study by the Social Science Research Network. Indeed, they would not be able to cope with a massive and rapid wave of withdrawals from their customers. Even more feverish since the bankruptcy of SVB, these 186 institutions are at risk of depreciation for insured depositors, with potentially $300 billion in insured deposits at risk.

In such a context, the banking sector should show signs of nervousness for many months, while the tech sphere, which has trembled as rarely in recent years with the fall of SVB, should review its copy; entrepreneurs and investors would be well advised to place their money in several banks instead of just one, to avoid being trapped. Be that as it may, the next few months will not be easy for the financial directors of start-ups and investment funds.

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