[Editorial] Not a fire across the sea

Silicon Valley Bank (SVB) that ranked 16th in the U.S. with assets of $209 billion under management became the largest bank failure since the 2008 financial crisis after the bank closed amid a liquidity crisis from the steepest benchmark rate hikes since the 1980s.

SVB, a lender to some of the biggest tech names, was pivotal to the rise of Silicon Valley and U.S. innovations over the last 40 years. Its bust in just two days after a bank run has raised fears about the blow to the Silicon Valley ecosystem as well as the U.S. financial system in the likes of the 2008 meltdown.

The ultra-loose monetary and fiscal policy during the pandemic period — which fueled a boom on the IT industry and asset investment with lush liquidity and stimuli funds — have brought about the doom for the bank. Deposits that amounted to $60 billion at the end of March in 2020 ballooned to $189 billion by the end of 2021. As selling loans had not been profitable with the rate being near to zero, the bank invested most of its deposits in treasury bonds for higher returns.

The business turned murky when the Federal Reserve started to raise interest rates and the IT industry turned sour. Its primary clients — venture capital and tech enterprises — began to pull out their deposits. SVB frantically tried to sell its treasury bonds, but only made huge losses after their prices tumbled from benchmark rate hikes. It disclosed on March 8 that it had lost nearly $2 billion and announced a recapitalization scheme the following day, which only spooked its clients. On Friday, the California Department of Financial Protection and Innovation shut down the bank. The majority, or 93 percent of its deposits, exceed the insurance coverage of $250,000 per account.

The Fed may have to check itself before continuing with the rate increases, as the spike from zero up to 4.75 percent in the base rate contributed to the crumble of SVB. U.S. financial authorities claim that the crisis won’t escalate into a banking crisis because most big lenders have allocated their assets widely. But smaller players could be further strained if treasury bond prices tumble in case the Federal Open Market Committee delivers a rate of half a percentage point on March 21 to 22 as the chair indicated. The Fed now would have to deliberate harder what is more urgent between strong inflation or financial crisis.

Korean authorities are watchful of the impact on the local market. In their regular meeting on Sunday, fiscal, financial and monetary chiefs raised concerns over the heightened volatility from the SVB crisis and the potential financial and macro-economic impact. SVB woes should be a lesson for regulators and lenders to examine banking integrity.