DThe American central bank, the Federal Reserve, has announced a closed meeting of its most important decision-making body for the beginning of the week on Monday. The Fed announced that the primary focus would be advance and discount rates.
The central bank gave no details. There is extreme turmoil on the financial markets at the moment because of the collapse of California’s Silicon Valley Bank last week. According to the prevailing opinion, the scheduled special session should be related to this.
The Silicon Valley Bank (SVB), which specializes in start-up financing, was temporarily closed on Friday after a failed emergency capital increase and placed under state control. This was announced by the American deposit insurance company FDIC. At the SVB, which was founded in 1983, there had been immense withdrawals of funds in the past few days as a result of liquidity concerns.
Experts try to calm down
SVB shares were suspended from trading on Friday after a price slide due to the acute emergency. Other banks also came under considerable pressure on the stock exchange. The SVB caused a stir on Thursday when it surprisingly announced it would issue shares after a major sale of assets resulted in a loss. The shares posted a drop of a good 60 percent on Thursday alone.
The voluntary liquidation of the crypto bank Silvergate Capital had also sent shock waves through parts of the financial sector. In the wake of the bankruptcy of the crypto exchange FTX, Silvergate had already warned that the business might have to be discontinued. However, Silvergate announced that it would repay all customer deposits.
The fear of loan defaults in the banking sector, which was triggered in America, also had an impact on this side of the Atlantic: The share prices of Deutsche Bank and Commerzbank fell significantly at times.
Summers speaks of “overreaction”
However, some banking experts consider the concerns that have now been expressed to be exaggerated. The events in California represented a “prime example of an inappropriate panic reaction on the part of the stock markets,” said Rainhard Schmidt of the Goethe University in Frankfurt. “The price drop was inappropriate because the Silicon Valley Bank pursues a very special business model that really bears no resemblance to almost all banks in most countries.” So there is no systemic risk and no reason for further-reaching concerns. “The rapid, extensive price recovery was fully justified.”
Financial market expert Wolfgang Gerke made a similar statement. “The SVB Bank does not endanger the international capital market. Your cluster risk from start-up financing is atypical for the banking sector,” said the President of the Bavarian Financial Center. “German banks are in a stable position with their equity buffers and business models. There are dangers in the USA from the large bond portfolios of smaller banks,” emphasized the economics professor.
From the point of view of the Harvard professor and former US Treasury Secretary Larry Summers, great concerns about the risk of infection are exaggerated. On Bloomberg TV he spoke of an “overreaction”. As long as the crisis at SVB is managed properly and customer funds are paid out, no systemic risks for the banking sector can be expected.
The high price losses of many bank stocks in the wake of SVB had clouded the mood for the industry as a whole. Thursday saw the biggest sell-off in the banking sector in almost three years, as the KBW Bank Index tumbled 7.7 percent. On Friday, the important industry barometer lost 3.9 percent.
Silvergate and SVB “are indeed victims of the same phenomenon, as US monetary tightening skims the foam from the most surplus parts of the economy – and it’s hard to find more surplus than in crypto and tech startups” , said Vital Knowledge analyst Adam Crisafulli.
“The Silicon Valley Bank still seems to be an isolated case,” emphasized fund manager Thomas Altmann from asset manager QC Partners. “But previous crises have shown how great the risk of contagion among banks is. That’s why investors are so sensitive to the news from California.” Another trader also spoke of a mood dampener. However, the problems of the SVB are not a direct indicator for the sector.
Joachim Klement from the investment bank Liberum Capital spoke of growing fears of a credit crunch. However, he does not believe that the situation of the SVB poses an immediate threat to the European banking system. The institute has a very special business model and specializes in venture capital and the financing of young growth companies. This is quite unique within the banking scene. Non-performing loans are likely to increase this year, but the reserves of banks in Europe and America are sufficient to absorb problems.
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