Silicon Valley Bank Collapse: Federal Reserve Takes Action To Stabilize Banking Sector
Silicon Valley Bank, the 16th largest bank in the US, collapsed on Friday in a rapid turn of events after facing liquidity concerns, resulting in the second-largest failure of a financial institution in US history. The bank reported losses of $1.8 billion from the sale of a $21 billion bond portfolio, which was hit by rising interest rates. Depositors pulled out their money and plans to raise more capital failed, forcing bank regulators to close the firm.
In a last-minute deal, British bank HSBC has acquired the UK arm of Silicon Valley Bank, securing the future of thousands of British tech firms that hold money at the lender. The Bank of England made the announcement, noting that all depositors' money is safe.
Analysts at Goldman Sachs, led by Farid Karoui, noted that the risk of contagion from small to large banks is remote and the risk of a capital or liquidity event among large banks is also remote. They reiterated their overweight recommendation on the sector and suggested using any large selloff as an opportunity to add risk.
The 10-year US Treasury yield decreased by 0.03 percent to 3.67 percent, whereas the two-year note yield dropped by 0.14 percent to 4.45 percent. European stocks declined in early action on Monday, while U.S. stock futures were pointing higher after a turbulent weekend.
The US Federal Reserve is also making additional funding available for eligible financial institutions to prevent runs on similar banks in the future. They have announced the creation of a new Bank Term Funding Program (BTFP), offering loans of up to one year in length to banks, savings associations, credit unions, and other eligible depository institutions pledging U.S. Treasuries, agency debt and mortgage-backed securities, and other qualifying assets as collateral.
Overall, the Federal Reserve is taking actions to help stabilize the banking sector and ensure that banks can meet the needs of their depositors. This will help prevent a broader contagion from smaller regional banks, while US and European stocks reacted differently to the news. US inflation and the movements of cryptocurrencies will be closely watched in the coming days.
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