How Banks Across the Globe Failed
People gather outside Silicon Valley Bank (SVB) headquarters in Santa Clara, California | Photo Credit: Justin Sullivan/Getty Images via NPR
On Mar. 10, the Federal Deposit Insurance Corporation (FDIC) in the United States took control of Silicon Valley Bank (SVB) after billions of dollars were withdrawn by depositors and the bank defaulted. As a result of this, a couple of days later, two other banks defaulted as well, creating negative consequences globally.
The FDIC was created by the US Congress to ensure that the country’s financial system is stable and public confidence is maintained.
SVB is located in Santa Clara, California, but has branches in Canada, China, Germany, India, Israel, Sweden, and the United Kingdom. According to Wall Street Journal finance reporter Ben Eisen, “This is the second biggest bank failure that has ever happened in the United States.”
In a regulatory filing on Mar. 8, SVB announced it sold a large number of securities at a loss of around $1.8 billion to help it cover the decline in profits. After this, clients of the bank became cautious of this event and started withdrawing a lot of money from their accounts.
During the pandemic, Silicon Valley Bank’s deposits skyrocketed and had more money in bonds as businesses began to deposit more money. That all collapsed as interest rates were raised. As interest rate prices rise, bond prices fall. Soon, SVB’s bonds were worth $17 billion less than their initial value. Adding on to this decline, the interest rates caused fewer deposits to be made in the bank, which led to the bank losing a great deal of money.
Two days after SVB defaulted, another American bank, Signature, was seized by regulators. The bank was seized, according to The Wall Street Journal, due to US regulators taking measures to ensure that depositors won’t pull their money from other lenders.
A few days after the collapse of the two American-based banks, the Swiss bank Credit Suisse defaulted. According to the Washington Post, the bank’s scandals caused it to lose billions of dollars in profits. Among its misconduct include a criminal conviction for allowing drug dealers to launder money in Bulgaria, a spying scandal involving a former employee and an executive, and a massive data leak. Shortly after that, the bank faced “unprecedented client outflows in late 2022.”
A woman walks past First Republic Bank | Photo Credit: Loren Elliott/Reuters
Investing in banking assets and cutting costs helped the bank gain more wealthy clients at the beginning of 2023. However, in the aftermath of Silicon Valley Bank's collapse, investors were more cautious when choosing their bank and avoided Credit Suisse.
Net losses of the bank prompted them to ask the Swiss National Bank, the central bank of the country, for a public statement of support. The central bank noted the economic decline should Credit Suisse collapse, so they offered to lend the bank 50 billion Swiss francs and buy back up to 3 billion francs of debt. Soon after, Credit Suisse was bought by UBS–a major rival–for around $3.25 billion.
In the long term, the international bank collapses will only affect Canada in terms of trade. CBC reports that banks might not be open to lending as much money or investing in equity bonds. The growth of global and US gross domestic product will be affected as investing patterns could change. In turn, weaker GDP growth in the US will not be ideal for Canadian exports.
The crisis may also create an ease in Canadian inflation rates, states an opinion in The Financial Post by Steve Ambler and Jeremy Kronick. The article cites how the Bank of Canada has been taking stricter measures to bring the inflation rate down. And that fewer measures enforced by the Federal Reserve result in a slim difference between US rates and Canadian rates. A larger variance would pressure the Canadian dollar, and could have caused import prices and inflation to rise.