The long wave of the failure of the Silicon Valley Bank has turned into a nightmare day for European stock exchanges. The Ftse Mib from Milan it closed with -4%, destroying over 24 billion in capitalization. The same fate also for the other main European indices: -3% for the Frankfurt Dax, -2.9% for the Paris Cac 40 and -2.5% for the London FTSE 100. And yet, according to the economist Angel Baglioni, professor of monetary economics at the Catholic University of Milan, there is no reason to be alarmed. «The reaction of the European stock exchanges was almost emotional. The European banking system, however, is solid: there are no alarm bells or reasons for concern». The intervention of the US government also contributed to calming the markets and avoiding a wildfire expansion of the crisis. Over the weekend, Washington assured that the deposits of all Silicon Valley Bank customers – including companies – will be repaid. A line also claimed today by Joe Biden in his speech to the nation.
Professor, why did Silicon Valley Bank fail?
«At the root of its failure there is above all a problem: the bank’s strong exposure to medium and long-term government bonds. These are securities that are very sensitive to changes in interest rates, which – as we know – have grown a lot in the last year. In the USA, in particular, there was an increase of 4 and a half points. This led to a reduction in the price of the securities on the market and, consequently, a devaluation of the Svb portfolio. In recent weeks, current account holders have begun to become alarmed, until the real bank run broke out».
Why was no one able to foresee this crisis?
“There are responsibilities to be clarified. It is clear, for example, that there has been a management error. The management of the bank could have predicted as early as a year ago what would happen with inflation and rising interest rates. The leaders could have taken precautionary measures, for example by selling some of those government bonds before they lost too much value. Certainly, however, the shortcomings of the supervisory bodies will also need to be clarified ».
After the bankruptcy of Svb, the US government intervened immediately to avoid the “infection” of other banks. Have we learned from the mistakes of the 2008 financial crisis?
«The American government has moved very quickly and decisively, especially with the total guarantee of deposits, including those exceeding 250,000 dollars. It is a very important provision, which will cost the state coffers a lot. At the same time, it is a necessary move to prevent the crisis from spreading and presenting an account that is even higher than the current one. In 2008, as is well known, a mistake was made: letting Lehman Brothers go bankrupt by imposing large costs on its creditors. This acted as the detonator of the crisis, which then led to Europe and made us lose all confidence in the banking system”.
Could the Silicon Valley Bank crash have similar consequences? Or is it just a passing chaos?
“Making predictions is still difficult. From what we have seen so far, however, it seems that this problem concerns a very particular business model, linked to the sector ofhigh tech Californian. As a result, I believe that other medium-sized banks will file for bankruptcy. But with the deposit guarantee announced by the US government, the problem will remain narrow. I don’t see the risk that the crisis will spread like wildfire».
How will monetary policy change on interest rates?
“This is a big question mark. Some say the Federal Reserve will now be more careful about raising rates, as we are starting to see the backlash. I don’t think there will be major changes in monetary policy, especially by the ECB in Europe. The Fed acts to achieve two goals: price stability and full employment. It is vigilance that has to take charge of what is happening after the bankruptcy of Svb ».
The Brussels leaders ensure that there will be no consequences in Europe. So why does Wall Street hold up and European stock markets crash?
«The European stock exchanges have suffered almost emotionally from this crisis. The American ones, on the other hand, have had more time to metabolize the reassurances of the last few hours, also thanks to time zone reasons. The hour-by-hour trend of the stock exchanges must be taken with due caution. It’s true: there was a negative reaction from the stock exchanges today, but I think the prices will recover. There is no reason to fear a contagion for European banks.
Why is the Milan Stock Exchange suffering the most?
«It is difficult to say, even if the differences with the other European exchanges are not so marked. Certainly Italian banks are very exposed to government bonds and this may have played a role. However, the fact remains that the case of Italian banks is totally different from that of Silicon Valley Bank, so here too I believe that there will be a recovery of the lost quotations. You don’t need to look at the daily performance of the shares: it’s too short a time horizon».
In recent days, the US government has publicly intervened to calm the markets. Should the European Union do the same?
“So far there has been a reaction from the stock markets, but for the European banking system there are neither alarm bells nor runs on the banks. Consequently, a position taken by the supervisory authorities would be premature. The ECB is right to intervene with great prudence in public statements”.
How will the situation evolve now?
«The most probable hypothesis is that, after Svb and Signature Bank, other banks in the sector will emerge with similar problems. However, I repeat, I believe that the problem will remain limited to a few banks».
Cover photo: EPA/CJ GUNTHER | A branch of Silicon Valley Bank in Wellesley, Massachusetts (March 13, 2023)
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