The World Watches Silicon Valley Bank's Collapse And Braces For 2008 Déjà Vu
The effects of the fall of Silicon Valley Bank show the limits of the tech world, but also the current fragility of the international financial system a generation after the 2008 global financial crisis that was sparked by U.S. bank failures.
New York Stock Exchange on Feb 28, 2022.
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PARIS — Five months after the collapse of cryptocurrency exchange FTX, which continues to shake the crypto world, it's the turn of Silicon Valley Bank, which was at the heart of U.S. start-up financing until it failed on March 10.
It is still too early to know if this new fire will spread or be contained quickly, but lessons can be drawn from the bank's failure, which looks like the consequence of the abrupt transition from the era of free money to the era of rapidly rising interest rates.
The first lesson concerns the world of start-ups.
It is surprising and distressing that this ecosystem, so quick to disrupt the models of the past, should find itself trapped by the simple fact that a traditional bank has become a must-have in Silicon Valley.
This has left the entire venture capital world on edge.
The second lesson is regulatory.
The collapse of SVB is the second largest bank failure in U.S. history, after the 2008 failure of Washington Mutual. Now, 16 years after the explosion of the subprime bubble, the SVB collapse testifies to the weaknesses of American banking regulation when it comes to monitoring local banks, which are a crucial part of the economy.
The persistent fragility of banks
The disappearance of SVB also says a lot about the state of global finance.
First, it shows the astonishing fragility of banks and the financial system as a whole.
We are all paying for years of zero interest rates.
By focusing too much on the desired effects of increasing interest rates in terms of reducing inflation, we have ignored the bad side: real carnage in the valuation of central banks' bond portfolios.
If they are forced to dispose of them, they will take colossal losses, and risk not being able to pay for it. Now, we are all paying for years of zero interest rates. The accounts had to be settled one day. That day has arrived.
The SVB episode also shows the incredible nervousness of investors.
While observers agree that the stock market's rebound this year has been suspicious, the recent news shows that they are far from calm, and that at any time they can lose confidence, panic and even cause a global market crash in a matter of hours.
