jordan pulse -

Muhanna Nafa'a

Silicon Valley Bank is a local American bank located in the state of California, and it is a specialized bank, as the majority of its clients are owners of start-up companies, which are usually funded by speculative companies that venture to finance them through the same bank for what is expected of a high return after marketing their promising innovations, which is Companies working in the field of technology in general, including companies working in the field of technology whose work is related to the field of health care.

Through our understanding of the world of technology, we know that this type of clients of this bank have capabilities that may outperform others to follow up on every small and large matter related to the various indicators of the world of the economy and the analyzes and expectations based on them, through which they also understand what is related to the conditions of stock markets, bonds, real estate and banks, It is a bank ranked sixteenth among the banks operating in the United States, although its assets are not that huge when compared to the size of its value with the rest of the banks. The gross domestic product of American banks is about $ 22 trillion, and the reader may wonder how a bank can acquire this advanced rank among 2124 bank in the United States? The answer would be that there are only four major banks, the value of their assets is about nine trillion dollars of the gross domestic product, and the values of assets that come after them are significantly lower than that.

This bank, whose assets amounted to 209 billion dollars at the end of last year, and its deposits reached about 174 billion dollars, is distinguished by the fact that its investments are only directed towards safe investments that are completely free from any kind of risk, such as investing in government or corporate bonds or investing in real estate covered by insurance. The rate of inability to pay for its customers was one of the lowest percentages, and it is hardly mentioned, as it is often less than 1%, and it was also known for the (capital adequacy ratio) imposed by the US Federal Reserve System on banks. To collapse so quickly?

It is known that any change in the interest rate is directly reflected in the value of long-term government bonds. When this bank bought those bonds with a return of 2%, it had full confidence that this investment is one of the best investments that are characterized by distancing from risks, but when the US Federal Bank raised that The successive interest rate has reached the yield of the bonds today to approximately 5%. Whoever owns bonds with a return value of 2% will keep their return as it is. As for those who will buy new bonds, their return will be only on the new rate, so as long as you do not need liquidity and do not want to sell your bonds, you will not lose anything. And you will be satisfied with the return to transfer the old one 2%, and if you wish and have more liquidity, you can buy new bonds with the new return that we mentioned about 5%, but if you need liquidity and you sell your bonds linked to the old return, no one accepts to buy them from you at the same value because their return is double compared to Today's bonds, which forces you to sell them at a loss below their value, and this is what happened with this afflicted bank, as it lost by selling a portfolio of bonds of 1.8 billion dollars.

I expect now that the question that will come to your mind is why this bank was forced to sell those bonds? The reason for this is that the speculative companies that were borrowing from that bank to finance emerging companies have decreased their borrowing rate significantly as a result of the rapid increase in the interest rate that was approved by the Federal Reserve Bank, as well as due to the decline in investment in general due to its policy to curb the rate of inflation and direct liquidity towards banks. In a previous article entitled (So that we do not pay the price for the consequences of treating their economy), yes, it is also one of the repercussions of the Federal Reserve’s decision to raise the interest rate successively.

As for the misfortune of this bank, which, as I mentioned, is that its clients are informed of many events in the stock markets, as soon as the news of its loss in that portfolio spread, although it had the full ability to overcome that loss, the spread of the news led to a decrease in the value of its shares and also led to depositors panicking and heading directly to withdraw their deposits In a way that exceeded all expectations, the withdrawal of deposits in one day amounted to 42 billion dollars, and it is natural that this bank does not have all this liquidity, which, like any bank, has several aspects of investments that take a good part of its liquidity, so this abnormal demand for withdrawals of deposits was every The effect of stopping its capabilities completely from meeting this momentum for the rest of the customers, and thus declaring its inability to do so, is (trust) what this bank lost despite the solvency of its assets.

And I recall what I wrote in a previous article about former President Roosevelt’s saying, which warned of the danger of the public’s panic and its willingness to act like this. What is true, as for what worries us, is the fear of individuals that pushes them to actions that make things more difficult for us. That saying was, "The only thing we have to fear is fear itself."

Finally, I also mention to you the common saying of all experts that the Federal Reserve will not stop its policy of raising except when an event occurs, and here this event occurred with the collapse of the Silicon Valley Bank, which was one of the first victims of that policy, so will it really stop and change its policy by raising the interest rate Successive and reinforcing the principle of (trust first), which sits at the top of the list of factors for the success of any of the banking sectors?
Muhanna Nafa'a