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Biden, after the bankruptcy of Silicon Valley Bank and Signature: “The banking system is solid. Your deposits are safe


The president of the United States has sent a message of tranquility after the bankruptcy of two banks in three days

The president of the United States, Joe Biden, has sent this Monday a message of calm about the solidity of the banking system after the bankruptcy of two banks, Silicon Valley Bank (SVB) and Signature, in three days.

"Rest assured: the banking system is solid, your deposits are safe" and "they will be available when you need them," he assured in a brief statement in the Roosevelt Room of the White House, before traveling to California.

The Head of State has also announced the dismissal of those responsible for the SVB and has called for stronger regulatory measures for the sector.

Biden was speaking after US financial authorities announced on Sunday that they will guarantee all deposits of the SVB, whose bankruptcy on Friday threatened to drag down other regional financial institutions and create a crisis of confidence in the country's banking system.

In the event of a bank failure, regulatory bodies cover deposits up to $250,000, but 96% of the Californian entity's funds exceeded that parameter and were not guaranteed.

A disaster for his clients, most of them companies in the technology sector —many of them startups— that needed access to that money to make their own payments.

The Federal Reserve and the Treasury Department have indicated that, in addition to supporting SVB deposits, they will create a new lending mechanism for banks that may be affected by a wave of withdrawal demands from their clients.

The problems at SVB, the 16th largest bank in the United States, arose from its investment decisions.

The bank placed more than half of its deposits in fixed-income government bonds, considered low risk compared to new lending.

But the rise in interest rates, forced by high inflation, caused those securities to lose value, while the technology sector entered a time of lean times.

A perfect storm: as its clients began to withdraw deposits to meet their obligations, the entity was forced to sell its bonds at a loss of about 1.8 billion dollars.

The recommendation of venture capital investors to startups to withdraw their deposits from the bank was the final straw.

On Thursday, SVB clients withdrew 42 billion dollars in ten hours, the largest deposit drain from a financial institution in the United States in recent times: until now, the record was held by Washington Mutual in 2008, with 16.7 billion dollars in ten days.

The new mechanism put in place by the Fed and the Treasury seeks to avoid a repetition of these events.

Instead of being forced to sell their bonds at a loss, banks that need it will be able to request loans from that body and use those titles at their original value as collateral.

In his brief speech, Biden wanted to send Americans a message of calm about one of the great citizen concerns since the global financial crisis of 2008. "Taxpayers will not have to assume any type of loss," he stressed.

The cost of these operations will be covered by the fees that banks pay to regulatory bodies.

There will be no bailout for investors in the bank either: “They knowingly made a bet, and they lost it.

Capitalism is about that, ”he stressed.

Yes, he will ask Congress for tougher control measures on the banking system, to prevent this type of problem from reappearing in the future.

Following the 2008 crisis, the US government undertook a broad reform of the sector that included greater oversight of regulatory bodies, in what is known as the Frank-Dodd law, by the senators who wrote it.

But during the term of Donald Trump (2017-2021), part of those provisions were annulled, Biden recalled.

Despite the messages of calm from the US authorities, the markets reacted nervously on Monday.

Investors remain concerned that contagion from SVB could spread to other smaller and regional banks.

Another bank with problems similar to those of SVB, First Republican, with a client portfolio made up mainly of very wealthy companies and depositories, saw its share price fall by 60%, after several days of consecutive falls.

Not even banking giants such as Wells Fargo or Bank of America were saved, which also registered decreases in their titles.

The uncertainty surrounding the sector may also affect the decisions of the Fed, which will hold its monthly meeting next week to decide on interest rates.

Until now it was taken for granted that he would announce another rise, in line with his strategy to combat inflation.

But events may force him to change his mind and put further increases on hold, at least for the moment, given signs of the pressure that high rates are imposing on bank ledgers.

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Source: elparis

All business articles on 2023-03-13

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