Its collapse on Friday – the largest bank failure since the 2008 financial crisis – had a unique set of circumstances but raised questions about hidden weaknesses that could have consequences for its customers and employees, and potentially highlight issues in other US banks.
“These banks that have large amounts of institutional uninsured money … that’s going to be hot money that runs if there’s a sign of trouble,” Bair said.A sequence of events led to SVB’s failure including it selling US Treasury bonds to lock in funding costs due to expectations of higher interest rates, resulting in a loss of US$1.8 billion .
“Banks are opaque, so immediately, we all go ‘wait a minute, how interconnected is this bank to another one?’” said Mayra Rodríguez Valladares, a financial risk consultant who trains bankers and regulators. “Investors and depositors do not want to be the last ones turning out the lights in the room, so they have to leave.”Several experts said any ripple effects in the rest of the banking sector may be limited.
The banking sector steered through the COVID-19 pandemic, thanks in part to tougher rules put in place following the global financial crisis in 2008. However, during president Donald Trump’s administration, some rules were eased. Those easier rules for regional banks are likely to come under scrutiny as watchdogs look to ensure they too have enough cushion to weather similar stresses, some regulatory and industry sources said.