(Republicaninformer.com)- The Federal Reserve, the Treasury, and the FDIC are all concerned about the potential for a domino effect after the failure of The Silicon Valley Bank (SVB).
The SVB failure caused attention to be focused on a $620 billion banking time bomb that might trigger a global economic catastrophe.
The disconnect between SVB’s asset value and market value contributed to the bank’s collapse. A run on the bank was sparked when SVB sold off some of its assets, scaring off investors. But, SVB is not alone; the Federal Deposit Insurance Corporation reports that all US banks have $620 billion in unrealized potential losses as of December 31st, 2018.
The $620 billion unrecognized potential loss problem has the ability to swiftly deplete bank reserves beyond what their books would indicate.
Banks’ liquidity problems were noted by the Federal Reserve, which on Sunday announced plans to provide a facility to assist financial institutions deal with withdrawals of depositor funds. The government has taken action to protect SVB depositors in an effort to reduce industry-wide panic after the bank’s failure.
The banks got themselves into this jam by stockpiling bonds and treasuries when interest rates were near zero. Nevertheless, the Federal Reserve has recently began raising rates to battle inflation, which has led to a precipitous decline in the value of many of these assets.
This is because new bonds provide better rates of return to investors at higher interest rates. Because of their lower yields, older bonds are less attractive to investors, leading to a precipitous decline in the value of such bonds.
The maximum amount of insurance provided by the FDIC is $250,000, yet many SVB customers had accounts much beyond that amount. On Sunday, the government declared its intention to protect deposits of above $250,000.
When SVB announced last week that it had sold treasuries at a loss, investors panicked and began withdrawing their money. A total of $42 billion was withdrawn by consumers in a single day on Thursday. Senator Mark Warner has said that Washington Mutual “lost $16 billion dollars over 10 days” during the 2008 financial crisis (D-VA).
After reporting on Friday that it needed to raise nearly $2.2 billion to be viable, the bank, the 16th biggest federally insured bank, was taken over by authorities.