Many lessons left after the collapse of 3 major banks in the US

This past week, the United States witnessed one of the biggest financial crises in its history, since the bankruptcy of Washington Mutual Bank in 2008.

Specifically, three major banks, Silvergate, Silicon Valley (SVB) and Signature (SB), collapsed within days of each other, causing the banking sector of the world's largest economy to suffer.

Many have compared the SVB collapse to the 2008 crisis, while some experts have compared the current situation to the savings and loan (S&L) crisis of the late 1980s and early 1990s.

One thing is for sure, though: SVB's collapse will leave behind lessons, especially for startups.

Looking back at previous banking crises

After the collapse of three major banks in the US, especially SVB - a bank in the top 20 largest commercial banks in the US, investors are wondering what might happen next.

Will it be a widespread financial system-wide turmoil, tighter US government regulations, the Federal Reserve stopping raising interest rates, or even something else entirely?

Many lessons left behind after the collapse of three major banks in the US. (Photo: Xinhua).

To answer these questions, lessons from the past will provide answers for the future. Although the SVB shock has many people thinking of a similar financial crisis in 2008, analysts go back further than 1991 to make more accurate predictions.

According to analysts, the current banking crisis in the US is very different from what happened in 2008. First, the cause of the crisis 15 years ago originated from hard-to-value assets such as mortgage-backed securities (MBS), making it difficult for banks to determine their value.

However, this time, troubled assets such as US Treasury bonds and other bonds were easier to price and sell, making US government intervention more effective.

And most importantly, in this crisis, the government stepped in early to guarantee all customer deposits and restore confidence in the US banking system.

The Federal Deposit Insurance Corporation (FDIC) is also paying up to $250,000 to each depositor and major banks to help them weather the current crisis.

However, that does not mean that the US banking system is free of difficulties ahead, as shown by the sharp drop in bank stocks during the trading session on March 13.

Therefore, to better understand the current banking crisis, analysts suggest studying the case of the savings and loan (S&L) crisis.

S&Ls act like banks but specialize in taking savings deposits and making mortgage loans. In the 1980s, when the U.S. government deregulated them, they began using customer deposits to make risky investments.

However, these investments underperformed and S&Ls suffered losses at the same time the Fed raised interest rates. This left borrowers unable to repay their loans. As a result, many S&Ls collapsed and the U.S. government had to step in to rescue them.

If there is any similarity between the current crisis and what we saw in the S&L crisis, it is that it is a typical bank failure. The only difference is that the US is dealing with a bank that is more focused on technology than real estate , according to TD Cowen analyst Jaret Seiberg.

Since the S&L crisis, US regulators have prevented banks from engaging in short-term investments, which inadvertently caused SVB's collapse, Seiberg said.

Many experts compare the current collapse of three US banks to the S&L crisis at the end of the 20th century. (Photo: Reuters).

What's next?

What lessons can we learn from the crisis? According to Kit Juckes of Societe Generale, a review of central bank regulation and policy seems certain.

If the S&L crisis “is a model for what comes next, we are closer to the peak of interest rates than the market has been speculating about,” he added.

From there, he commented that the FED might stop raising interest rates and the US economy would most likely fall into a mild recession this year.

In fact, many former bankers, economists and Wall Street analysts have called on the Fed to stop raising interest rates to fight inflation amid the current banking turmoil.

These experts believe that it was the Fed's tight financial policy that increased Treasury bond yields, partly leading to SVB's collapse.

Many warnings for startups

Startups are rethinking their banking strategies after the SVB incident. (Photo: The Economic Times).

The chaos left behind by SVB has posed a financial dilemma for thousands of startups from Silicon Valley to London, Tel Aviv and tech hubs across Africa that rely on SVB for everything from asset holdings to personal mortgages.

Many investors and tech companies believe the future will be much more difficult, even if the bank continues to operate under a new name.

Venture capital funds will have to question the banks they choose, while they will likely try more traditional options, said Edith Yeung, a general partner at Race Capital. She also advised that choosing a bank based on reputation is not enough.

Many startups plan to move their money to a large institution where they are assured that it will be safe, even if they don't get hyper-personalized service and high interest rates.

Some founders also plan to bank with Bank of America and JPMorgan. Deposit insurance is also a priority, with some startups planning to keep their money in multiple banks to stay below the FDIC’s $250,000 limit.

The collapse of SVB is also a wake-up call for some CEOs at startups about their financial management capabilities.

Pete Flint, general partner at NFX, said that after the recent incident, CEOs are not only interested in how to protect their cash, but also want to learn how to take advantage of the high-interest environment to make profits. He also recommended that founders make sure they have more than one bank account.

Vinh Khang (according to CNN, Bloomberg)

Source: https://www.nguoiduatin.vn/nhieu-bai-hoc-de-lai-sau-su-sup-do-cua-3-ngan-hang-lon-o-my-a598161.html