The Fed's bailout of Silicon Valley Bank revives panic over a banking crisis

The Fed's bailout of Silicon Valley Bank revives panic over a banking crisis

Fed Chairman Jerome Powell. / Efe

The Ibex falls more than 3% despite the US plan to avoid contagion from the financial earthquake | HSBC acquires the British subsidiary of the entity for the symbolic value of one euro

Clara Alba

Action Reaction. The Federal Reserve (Fed) seems to have learned its lesson well and did not want to wait for the start of the week to tackle the Silicon Valley Bank crisis at its root, which has reopened old wounds with serious doubts about the health of the US banking system.

In a joint statement, the body led by Jerome Powell, the US Treasury and the country's Deposit Guarantee Fund (FDIC) announced on Sunday night a real firewall to avoid contagion: a "emergency" financing plan that basically consists of loans that will allow banks in trouble to obtain resources to respond to possible moments of deposit withdrawals by their clients, without taxpayers having to answer for it.

On the one hand, the entities will hand over part of their bond portfolio as collateral, despite the fact that it may currently accumulate notable losses (due to the impact of interest rate rises). With the operation, cases such as that of the entity specialized in financing start-ups, which was forced to sell its bonds at a loss, are avoided.

The plan as a whole will amount to about 25,000 million dollars, although in the statement the regulators anticipate that "it is not expected to have to resort to these extraordinary funds." And as of this Monday, all the depositors of the firm that caused a real shock in the markets on Friday will be able to access their money.

The Fed has also decided to nip any signs of contagion in the bud, ordering the closure of Signature Bank, which in the last few hours had also suffered a notable flight of deposits. On the other hand, HSBC announced early on Monday the acquisition of the British subsidiary of the US entity at a symbolic price of one pound. An operation that is reminiscent of other moments of tension in the banking system, such as the fall of Popular, with Banco Santander taking over the entity for the symbolic value of one euro. In its statement, HSBC estimates that the subsidiary's capital would be valued at around 1.4 billion pounds.

We will have to wait a few days to see how investors digest these movements. But if there is a theory that is always true in the market, it is that money is very fearful and, faced with this situation, the firewall devised by the Fed has not yet managed to dispel all doubts in the Stock Markets. Investors do not want anything that smacks of risk and, after experiencing its worst week of the year with the collapse of the banking sector, the Ibex-35 starts the first session of the week with losses of 1% below 9,100 points.

Banks are once again the main victims, with falls of 3.7% for Sabadell, close to 3% for Unicaja and Bankinter and more than 2% for Santander and BBVA.

Investors keep all the alarms on in a week that will once again be key in terms of monetary policy. And not precisely because of the meeting of the European Central Bank (ECB) next Thursday, March 16, in which the market has been discounting a rate hike of another 50 basis points for some time. Investors will have all their eyes on the other side of the Atlantic, where inflation for the month of February will be announced on Tuesday.

The Fed has made it clear that it will continue to raise rates for as long as necessary if the data remains as persistent as it has been. The problem? That precisely this aggressiveness of the last few months -due to the rapidity of the increases- is largely to blame for what has happened with the Silicon Valley Bank, forced to sell its bonds at a loss to face the outflow of deposits.

For this reason, analysts such as Goldman Sachs say that "in light of the tension in the banking system, we no longer expect a rate hike" at the next Fed meeting, to be held on March 22.

«Rising interest rate cycles have historically caused entries into recession in 100% of previous cases. If we now add in the current moment, the speed of the rate increase that we are experiencing would be very difficult not to fall into recession, “adds Javier Molina, senior market analyst for eToro.

For their part, LInk Securities analysts recall that the SVB was the sixteenth largest bank in the US -the largest bankrupt since 2008- and that Forbes magazine declared the bank one of the best in the country in 2022. «With this We want to highlight that when depositors of an entity lose confidence in it, its strength and capitalization matter little. And the same thing seems to happen with fear in the market.