Financial Institutions Suffer Downturn amidst Biden's Attempts to Alleviate Concerns
Banks Falter Amidst Financial Instability
Asian and European financial institutions are feeling the heat, despite reassurances from the U.S. President that America's financial system remains secure, following the collapse of two U.S. lending institutions - Silicon Valley Financial and Trademark Bank.
The global market took a hit after authorities stepped in to protect consumer deposits, sparking concern about other institutions possibly affected by the fallout.
In Asia, the Topix Banks index plummeted by over 7%, marking its worst day in over 3 years, while shares of Mitsubishi UFJ Financial Group, Japan's largest banking institution, dipped by 8.1%. In Europe, Spanish Santander and German Commerzbank saw significant losses on Monday.
A slew of smaller U.S. banks also suffered hefty losses, despite promising clients they had enough liquidity to weather any shocks. The volatility has sparked speculation that the Federal Reserve may now reconsider its plans to raise interest rates, aimed at curbing inflation.
The collapse of Silicon Valley Bank (SVB) was primarily due to several critical factors, including insufficient regulation, lack of emergency central bank liquidity, deposit insurance limitations, ineffective risk management, concentration in specific investments and customer bases, and interest rate changes.
In response, U.S. regulators introduced a new means for financial institutions to borrow reserve in a crisis. Despite the government's effort to shore up confidence, concerns linger about the potential for contagion at other institutions.
According to Paul Ashworth of Capital Economics, the authorities have acted swiftly to stem the crisis but warn that there's no guarantee this will prevent further issues. Danni Hewson of AJ Bell expressed concerns about banks' ability to handle the era of high rates, as evidenced by the recent turmoil in the U.S. banking sector.
The federal chair, Jerome Powell, has promised a thorough review of the collapse, while politicians like Republican Senator Tim Scott have raised concerns about government interference in the market.
As the economy grapples with the fallout and the ongoing fight against inflation remains uncertain, regulatory authorities will continue to scrutinize the collapse and consider necessary policy changes to prevent similar incidents in the future.
Sources:
- BBC News, "US bank Silvergate closes as Silicon Valley Bank collapses"
- Bloomberg, "The Silicon Valley Bank Debacle: Who Let the Beast Out?"
- The Economist, "The Silicon Valley Bank collapse is a reminder of what can go wrong"
- New York Times, "How Silicon Valley Bank Failed, in Brief"
Last Updated: 14 March 2023 (Original article published with minor styling changes on 13 March 2023)
- The recent news about the collapse of Silicon Valley Bank has sparked concerns in the global finance industry, with losses being reported in Asian and European institutions as well.
- Amidst this financial turmoil, there are growing questions about the ability of banks, such as Mitsubishi UFJ Financial Group in Asia and Santander in Europe, to handle the era of high interest rates.
- As policymakers continue to review the collapse and consider policy changes to prevent future incidents, general news outlets are closely following the developments in the world of business and politics.
