(RoyalPatriot.com )- The sudden and seemingly overnight collapse of Silicon Valley Bank – and two other financial institutions – has highlighted a very real threat to the U.S. financial system at large.
One of the contributing factors to the collapse of SVB was the huge difference in the value of the assets that it held compared to how much they are now worth in the open market. What initially spooked investors was the fact that SVB started to sell some of those assets at a major loss, which triggered a full-fledged run on its deposits.
SVB isn’t the only bank that finds itself in this precarious position, though. In fact, the Federal Deposit Insurance Corporation, better known as the FDIC, said that as of the end of last year, banks all across the U.S. had $620 billion in unrealized potential losses on their balance sheets.
The culprits in this case are treasuries and bonds that were gobbled up by banks en masse during the height of the coronavirus pandemic and in the time immediately following, when interest rates were near zero. That strategy certainly worked then, but times have changed rather quickly.
With inflation rising at record levels for the last year-plus, the Federal Reserve Bank has taken an overly aggressive approach to trying to curtail increasing prices on consumer goods. They’ve done that by increasing interest rates at levels not seen in quite some time.
One of the effects of the rise in those interest rates is that the value of many of the treasuries and bonds that the banks purchased in bulk have taken a nosedive in value.
New bonds that are issued during this period of higher interest rates will accrue better returns for their investors. Because of that, the older bonds that the banks own have much lower return rates in comparison, which then makes them less attractive to investors.
The Washington Examiner pointed out recently that this whole conundrum means that many other banks could soon find themselves in a position where they have much less free cash on hand than their accounting ledgers suggested not that long ago.
The Federal Reserve took quick notice of this potential liquidity issue for the banks. So, it announced over the weekend that it would offer financial institutions a way for them to meet any depositor withdrawal requests, should they not have the cash available to do it on their own.
The FDIC guarantees all deposits up to $250,000, though many deposits at SVB were much higher than that. The Biden administration also took direct action to try to stave off a much larger financial crisis, saying that all depositors at SVB – even those with amounts greater than the $250,000 threshold – would have their money guaranteed.
President Joe Biden himself, though, said that the federal government wouldn’t bail out investors in these banks, since all investors take a risk that they’ll lose money.
