Black Immigrant Daily News
Central Bank of TT –
ALTHOUGH there is no direct contagion effect coming out of an emerging banking crisis which resulted in three US banks failing, the Central Bank is still being cautious noting that there could still be spillover effects that could affect Trinis locally and abroad, and regulatory and policy changes that could have repercussions on emerging nations such as TT.
Responding to questions from Newsday, a source at the Central Bank said the financial system in TT was basically sound and resilient.
“At the same time we are not immune to a greater concern globally about how all banks manage risk,” the source said. “Notwithstanding the strength and resilience of the domestic financial system there is need for constant vigilance.
“The situation with respect to the failed banks is fast-moving and uncertain, exacerbated by the jitteriness of investors in recent years. As a result, what started as problems in one or two banks threatens to spill over to other institutions.”
The source said TT’s Financial Stability Committee, comprising of representatives of the Securities and Exchange Commission, Deposit Insurance Corporation and Central Bank, held a meeting on Tuesday to assess developments coming out of the banking crisis in the US.
“The spillover to other economies may also be considerable, in light of the size of the US and how integrated financial markets are,” Central Bank source warned.
The US Fed’s concentration on taming inflation could, in the short term, affect American employment and growth, the source added. This means that all employees including migrants from other countries such as TT could face a squeeze on their general standard of living, and could affect their abilities to send money back home to their families.
Given the fact that one of the failed banks – Silicon Valley Bank (SVB) – had a high exposure to the tech sector, TT’s Central Bank expressed concern over the possibility that new policies could be put in place to tighten global regulatory standards related to concentration risk, which increases when banks invest too heavily in one sector, entity or geographic location.
The source pointed out that TT uses these standards set by US financial regulators to benchmark its own regulations.
“The US Fed has already increased interest rates meaningfully and there is general consensus that they will raise rates further.
“Banks around the world have already adapted, and planned for future rises. If interest rates go up much faster than anticipated, however, banks will need to quickly modify their strategies to avoid undue risk or losses.”
The source also warned that if the US did end up going into recession, global financial markets could become unstable, thereby affecting several aspects of international trade and financial flows, including demand for TT exports and incoming investments.
Why did SVB fail?
Silicon Valley Bank’s failure was the second largest bank failure in US’ history, next to Washington Mutual’s failure during the 2008 financial crisis. It was one of three banks which collapsed last week. Signature Bank and First Republic Bank both fell shortly after with First Republic Bank now being propped up by the US Government.
While the initial panic has been quelled, there is still a level of uncertainty in the US banking sector with the only salve being billions of dollars being injected into the banking sector to secure withdrawals for entities which put its money into SVB and to protect other banks from facing the same fate.
In SVB’s case, it was a perfect storm of increased interest rates from the US Fed, and a high number of withdrawals, called a bank run, which led to its downfall.
In February, KPMG gave Signature Bank, the parent company to SVB a clean bill of health for 2022, as the bank’s deposits surged 86 per cent in 2021.
But during 2022, deposits plummeted by 13 per cent or $25 billion. Part of this was caused by the Fed’s increased interest rates.
Now banks, by nature, are intermediaries.
Economics Observatory.com explains that banks take in deposits with a short maturity then lends them to borrowers and invests in a variety of fixed-income securities with long-term maturity such as government bonds. The difference in interest rates is how the bank makes its money.
SVB, mainly a lender to tech companies and start-ups, enjoyed benefits from a tech boom from 2020 to 2021, pushing deposits up from $65 billion in 2019 to $189 billion in 2021. Its customers mainly used the bank for paying employees and day-to-day operations.
The bank took those deposits and invested them in long-term fixed-income securities such as US Government bonds and mortgage-backed securities issued by the US government. At the time, interest rates on these assets were very low.
But when the tech bubble burst in November 2021, many of SVB’s corporate clients began to withdraw from its deposits in 2022. However, because about half of SVB’s assets were tied up in loans and Hold to Maturity (HTML) securities, SVB didn’t have much liquidity to meet the demand for withdrawals.
The company had to sell shares to cover increasing withdrawals.
In addition to the high withdrawals many of the investors in the bank had made deposits well in excess of $250,000, which is insurable by US law. S&P Global Market Intelligence data from 2022 indicated that 94 per cent of deposits to SVB were above the FDIC’s $250,000 insurance limit put in place after the 2008 financial crisis.
SVB announces US1.8b loss
At the beginning of March, SVB announced a US$1.8 billion loss as a result.
It announced a plan to raise US$2.25 billion by selling a combination of common and preferred stock.
To add to the increasing withdrawals, inflation prompted the Fed and other central banks globally to raise interest rates to tame inflation.
Wall Street Journal said US Federal Funds Rate rose from 0.25 per cent in March 2022 to 4.75 per cent in February this year. Meaning that the securities in which SVB invested dropped in value significantly.
By March 9, SVB’s Financial’s stock crashed and the panic began to set in, prompting SVB’s venture-capital firms to pull their money out of the bank and urged portfolio companies to do the same.
By the end of that day, depositors tried to take out US$42 billion.
The banks downfall also affected financial giants such as JPMorgan Chase, Bank of America, Wells Fargo and Citigroup as shares of these banks slid amid fears that other banks may have to take a hit to raise cash for withdrawals.
SVB’s shares were halted the next day and federal regulators announced they had taken control of the bank.
The closure of SVB and other banks triggered emergency federal efforts over the past week, including a plan to insure all deposits at SVB and Signature Bank above the $250,000 insurance limit; a loosening of borrowing guidelines for banks seeking short-term funding and a separate unlimited facility to offer one-year loans under looser terms to shore up troubled banks facing a surge in cash withdrawals.