Japanese media and experts blamed the US Federal Reserve’s continued aggressive interest rate hikes for the shocking collapse of Silicon Valley Bank (SVB) in the United States that triggered turmoil in global financial markets.
The Fed’s emergency shift in monetary policy could leave the US financial system vulnerable, or bind itself to future policy actions, analysts warned.
Continuous price drops in bonds held by SVB led to a large amount of booking losses, which might translate into real losses when the lender has to sell its bond assets due to tight liquidity.
News of such losses triggered ferocious withdrawals from the bank and a final shutdown, according to Takahide Kiuchi, an economist at Nomura Research Institute.
Start-ups, which SVB mainly serves, are experiencing the ebb tide in the US economic cycle as they began a run on the bank due to difficulties in raising funds, said Kiuchi, also a former Bank of Japan (BOJ) board member.
Kiuchi added the aggressive rate hikes put banks like SVB to trouble and pushed the US Treasury yield curve to its deepest inversion in more than four decades, with two-year note yields exceeding 10-year yields, thus making the business model of SVB hard to sustain.
The SVB’s collapse highlights the overall vulnerability of the US banking industry, the Nikkei reported.
As deposits are pulled for higher-yielding investments, many banks face huge paper losses in their bond operations, exposing them to huge potential risks, said the media outlet.
Data from the US Federal Deposit Insurance Corp. showed that unrealized losses, or assets that have decreased in value but have not been sold yet, of banks across the country swelled to $620 billion by the end of last year, which highlights the vulnerability of the US financial system in dealing with sudden shocks.
Kiuchi believed the fallout from SVB could spread around the world. Many banks in Europe and Japan also face large booking losses and inverted yield curves, and a string of problems could follow if trust in the financial system is damaged.
The SVB’s emergency shutdown has in fact led to a sharp rise in the market’s risk-averse sentiment. Money has been poured into safe assets, such as the Japanese yen, the Swiss franc, and gold since last weekend.
The Japanese stock market plunged for days, with the yen soaring and Japanese long-term interest rates decreasing significantly.
Since last year, Japanese government bonds have suffered continuous sell-offs as the interest rate spread between Japan and the United States further widened amid upward pressure on long-term interest rates and the BOJ.
Following the SVB’s collapse, the price of Japanese government bonds quickly rose while the yield of 10-year government bonds fell sharply.
CURRENTPH NEWS SERVICE
