After the second-largest bank failure in US history, investors are calling for government aid to prevent the crisis from spreading to other financial institutions and start-ups. Federal Reserve governors will hold a special meeting on Monday to analyze the situation and discuss liquidity support for bank customers and fragile financial institutions. President Joe Biden consulted with California Governor Gavin Newsom without any details. There will also be crisis meetings in London.
Winand von Petersdorff-Campen
Economic correspondent in Washington.
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The collapsed Silicon Valley Bank (SVB) was taken over by the state-owned Federal Deposit Insurance Corporation (FDIC) on Friday and will open its doors under a new name this Monday to give insured customers access to their accounts. However, only credit balances up to 250,000 dollars are insured. Around 94 percent of customer accounts are not covered by state insurance coverage. According to the American National Venture Capital Association, 37,000 small businesses are affected.
Fear of dramatic consequences
Panic has broken out in the start-up scene. Many SVB customers are start-up companies that now fear that they will not be able to pay their wages and projects. Financial investor Mark Cuban reminded that customers hold their accounts with the SVB as a prerequisite for granting credit. The bank, which until recently was largely unknown, played a central role in the loan financing of young companies.
In general, founders and investors fear dramatic consequences for the start-up scene in America and other countries. Gary Tan, head of influential venture and growth financier Y Combinator, warned that the "Googles and Facebooks of tomorrow" would be wiped out if a quick fix was not found.
In addition to Mark Cuban, well-known hedge fund manager Bill Ackman also demanded that the FDIC hedge all assets and announce this decision before financial markets open in Asia. Both Cuban and Ackman confirm that they have a small stake in companies that in turn have balances with SVB. Both fear according to their own statements a wildfire.
Liquidity support for UK start-ups
The fear of the crisis spreading has also reached England, Canada, China, Israel and other countries. In England, more than 200 company founders have called on Finance Minister Jeremy Hunt to intervene in an incendiary letter. The British subsidiary of SVB has been insolvent since this weekend. The loss of assets has the potential to set back the English start-up industry 20 years, numerous companies are insolvent overnight, according to the letter.
According to the Ministry of Finance, the government in London is working on liquidity assistance for British start-ups. Support for the bank was ruled out. SVB also has a branch in Germany, but its importance apparently lags behind the British subsidiary.
Smaller banks are now under considerable pressure. The concern is that they have comparable interest rate risk on their books. The SVB had stocked up on low-interest government bonds and government-backed mortgage bonds on a large scale, which depreciated significantly after the Fed's recent interest rate hikes. Billions of dollars in losses materialized as the bank sold bonds to secure its liquidity.
The FDIC launched investigations into banks suspected of managing a fragile portfolio. According to the financial news agency Bloomberg, the Fed and FDIC are working together on a financial vehicle to support uninsured account holders. The Fed did not comment on such speculation when asked.
US Treasury Secretary Janet Yellen specified in a television interview that banks could not count on help: the state had jumped to the side of investors and shareholders of systemically important big banks in the financial crisis. However, the reforms introduced since then would mean that such a step would not be repeated. "But we care about depositors and focus on meeting their needs," Yellen said.
Fear of a "bank run"
The way the U.S. government is managing the SVB crisis is likely to have an impact on bank customers who have balances in smaller banks with lower capital requirements. About a third of American assets are held by such institutions. Almost half of them are uninsured, experts estimate.
If SVB customers lose parts of their assets, this could trigger a "bank run", warn financial experts. The SVB showed that such a collapse can come very quickly: Within one day, customers had withdrawn 42 billion dollars before the Californian supervisory authority closed the institute.
Various venture financiers, including billionaire Peter Thiel and his Founders Fund, had withdrawn their money from the institution and urged their portfolio companies to follow suit. The billionaire, Tesla boss and Twitter owner Elon Musk flirted with the idea of buying the bank, as he spread on Friday via the short message service Twitter.
The Fed's interest rate turnaround, initiated after a long phase of expansionary monetary policy, is having consequences: technology stocks, cryptocurrencies and real estate funds are coming under pressure. Many banking institutions actually hold safe government bonds, which, however, can only be sold at a loss due to the new interest rate environment. Meanwhile, financial investor Nassim Taleb, author of the book "Black Swan," took to Twitter to mock his colleagues begging for state intervention: "Everyone is libertarian until they are hit by high interest rates."