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bankruptcy worries Europe and Asia

Silicon Valley Bank and Signature Bank folded. Could the failure of these banks herald a new financial crisis?

A bankruptcy of two US banks is sounding alarm bells. First, it was announced insolvency of US bank Silicon Valley Bank (SVB) in California, linked to technology companies.

Two days later, another bank was closed down in the country Signature Bank, headquartered in New York. The news is shaking the world’s financial systems and could herald hazy times for the US and world economy.

The closures were determined by the regulator, as a way of guaranteeing deposits, and the US authorities took control of the institutions. These are the most important bankruptcy cases in the country since the 2008 crisis.

SVB’s insolvency is the second worst in the entire history of the country. The Signature Bank case is the third most significant bankruptcy ever in the US.

All assets of the two financial institutions were taken over by the Federal Deposit Insurance Corporation (FDIC), the local regulatory body.

Bank failures reflect fragility of technology

It was a sudden end for SVB, a bank that in another era not so distant, made the financial markets all the rage. The international press describes an atmosphere of panic in the banking sector and it is certain that investors are doing math, questioning themselves about the consequences of this bankruptcy.

But what caused this seemingly sudden insolvency?

It is not news that we are experiencing years of great euphoria for the venture capital companies and start-ups market – all because of the lively search for which technological group would launch the next success story, the new Google, the new Amazon.

But recent times have brought a dodgy environment for the sector, with a heavy environment driven by rapidly rising interest rates.

The technology ecosystem began to face a period of doubt, which led to the bankruptcy of one of the main financial institutions specialized in these markets.

In comparison with the sharp declines in investments made in technology and with withdrawals from deposits by venture capital and of the start-ups that wanted to maintain their liquidity, SVB did not have many alternatives that could avoid the current outcome of the story.

The solution found, which didn’t work, was to sell its assets – but interest rate hikes broke the bank’s accounts.

This was the first US bank case to go out of business this year, just two days before the second case came to fruition. The regulator guarantees that US$250,000 in assets, the limit established for these applications in the US, will already be able to be transferred in the coming weeks.

The situation of Signature Bank customers and creditors is different. The FDIC determined that another financial institution act at the current time of transition, starting to take over the service. It should be remembered that, also in this case, a large part of the depositors are companies linked to the innovation economy.

Anxiety in Europe and Asia

The soundness of a robust banking sector appears to be at risk with the rapid rise in interest rates, which lower the value of bonds in their investment portfolios and raise debt rates.

The fear, unsurprisingly, quickly spread out of the US and into Asia and Europe. Analyzing the numbers of the various exchanges, referring to the week in which the North American banks closed, it is possible to understand the reason.

Four of the biggest US banks lost a staggering $52 billion in the stock market. Then, there were important falls for European and Asian banks, which accompanied the devaluation trend.

Société Générale in Paris lost 4.49%, while Crédit Agricole lost 2.48% and BNP Paribas another 3.82%. In Germany, Deutsche Bank was down 7.35%, Britain’s Barclays was down 4.09% and Swiss UBS was no better, losing 4.53%.

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