SVB collapse will make Russian economy stronger

The Silicon Valley Bank was serving start-ups — the driving force of world progress. Its collapse undermines the influence of the American banking system in the world. Russia can take advantage of the situation.

USA's best bank goes bankrupt

The pandemic helicopter money boom and the subsequent months were one of the best business periods in the history of Silicon Valley Bank (SVB, $200 billion in assets). The bank used deposit money to buy mostly long-term Treasury bonds and tripled its assets.

Less than a month before the collapse, Forbes Magazine recognised it as one of the best banks in the United States based on factors such as stability and profitability.

US regulators closed SVB on Friday as the bank was unable to pay its obligations due to the shortage of cash.

Fed's miscalculation: Either fight inflation or bank stability

The lack of liquidity was caused by the fact that the bank had lost $1.8 billion in government bonds sales, the value of which fell due to the increase in the discount rate.

After the pandemic, the Federal Reserve System started raising the discount rate to fight excess money inflation. A bond that cost, relatively speaking, $100 dollars dropped to $80. SVB was supposed to report the losses, but the bank was manipulating data instead to make everyone believe that there was no reason to worry.

On Thursday, SVB's shares took a 60-percent dive after the bank reported a difficult situation.

Many VC funds ordered their portfolio companies to withdraw funds from the SVB. Other depositors developed a concern too and staged the classic bank run action having withdrawn $42 billion in a day.

On Friday, the Federal Deposit Insurance Corporation (FDIC, a US regulator responsible for the stability of banks), ordered the SVB to be closed. ЫМИ stock trading was stopped as well.

Everyone panic!

New York's Signature Bank collapsed the following day. Two other banks can be next on the line. The FDIC can guarantee deposits in two banks, but there are over $23 trillion in deposits in the banking system.

It will take the US economy years to recover from the consequences of the SVB fiasco. By 2022, loan portfolios of small US banks had been the same size as those of large banks.

The Fed announced that it would not raise the rate any more. This may mean a new round of inflation. It's either fight inflation or provide banks with liquidity. It appears that the US banking sector has been trapped in a vicious circle.

What Silicon Valley Bank collapse means for Russia

  • Silicon Valley startups have been ruined even though the USA needs innovations in its competition with Russia and China in the field of defence and logistics;
  • US Treasury Secretary Janet Yellen was more concerned about bailing out Ukraine than bailing out the US banking system. She will have to get down to business now or she will lose confidence otherwise. The US banking system has never been stress-tested for stability with an interest rate hike. Cheap loans mean everything for America, and they have sunk into oblivion;
  • Many countries all over the world will lose confidence in the US financial system. The number of companies that had credit lines opened with SVB was plentiful;

The Fed will have to set the printing press going — this is not a good factor in terms of dollar credibility.

If the US financial system collapses, Russia will hardly be affected, because foreign investors' speculative sales in the Russian market are now impossible, and the Russian financial system is gradually releasing its currency from the dollar peg.

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Author`s name Lyuba Lulko
Editor Dmitry Sudakov