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10 WORLD NEWS 23.3.2023 FOR the past year, the US Federal Re- serve has raised short-term interest rates at the fastest pace since the early 1980s in an attempt to curb the hottest inflation since the early 1980s. But in its zeal to tame inflation, the Fed has been seemingly indifferent to all the ways that sudden sharp shifts in the econom- ic wind can have unintended and poten- tially severe side effects. at simple truth, which should have been obvious, made itself more than manifest last week when one of the larg- er financial institutions in the United States collapsed suddenly. Silicon Valley Bank as of March 1 was worth nearly $17 billion and had close to $200 bil- lion in customer deposits. Its customers were often venture capital firms and the companies that they funded, making the bank a powerful player in a lucrative niche. en, almost without prelude or warn- ing, those venture firms panicked when the bank announced that it was selling some of its Treasury bonds at a loss and they advised the firms they were back- ing to pull their money. Within two days, $40 billion was yanked, the stock plummeted and federal and state reg- ulators stepped in and took over. Two days after that, regulators seized New York-based Signature Bank, which had over $100 billion in deposits. ose two were the biggest bank fail- ures since the 2008-209 financial crisis, and the second and third largest bank collapses in U.S. history. And they happened almost overnight, with little build-up and few warning signs. Even the 2008 crisis, as severe as it was, was presaged by abundant signs that some- thing was amiss in the financial sector. ese two bank runs, followed by general panic among depositors and investors that all mid-sized banks were in serious trouble, were more like a sud- den car-crash: everything appeared rel- atively smooth until it absolutely wasn't. And the culprit in this case was the very institution whose mission is to prevent bank runs and systemic collapse: the Federal Reserve. e collapse of the two banks created an immediate panic in financial mar- kets, with shares of a nearly a dozen regional banks plunging on fears that customers would flee to the safer ha- vens of the large money centre banks such as J.P. Morgan Chase and Bank of America. Recognising that bank runs and panics tend to spiral rapidly and uncontrolla- bly, the Treasury Department and the Fed acted swiftly to guarantee that even as the banks themselves might be dis- solved and shareholders wiped out, ac- tual depositors would have full access to the funds and lose nothing. All of this happened so fast that it was difficult even for informed participants to keep up with the developments, let alone come up with a clear sense of what went wrong. ere is and will be considerable (and rather arcane) de- bate about whether the Treasury bonds that Silicon Valley held were sufficient to cover their short-term capital needs during a multi-month period where many of the longer-dated bonds (over 10 years) were losing value in the face of the Fed raising interest rates. What is clear is that in the wake of the last great financial crisis, banks were required to hold more capital and re- duce their risk. Silicon Valley Bank did just that in holding what are considered nearly risk-free assets, U.S. government bonds. e arcane part, albeit crucial, is that there is a significant difference in hold- ing 2-year bonds versus 30-year bonds when interest rates are rising quickly. Who is really to blame for SVB Volatility reigns in the fallout from Silicon Valley Bank's collapse. Shares in several regional US lenders tanked amid concerns over another bank run similar to the one that toppled SVB. But on Tuesday, stocks rebounded as investor fears cooled following government intervention. Pressure remains on regional banks. Here are four of the hardest-hit banks and why they could be at risk. First Republic The San Francisco-based bank tried to reassure customers on Sunday by saying it had secured "additional liquidity" from the Federal Reserve Bank and JPMorgan. But that didn't stop its shares from slumping on Monday, triggering several trading halts. Much of this activity was driven by concerns that First Republic has too high a proportion of uninsured deposits, leaving customers liable to losses. PacWest Shares nosedived on worrying similarities between its position and SVB's. They both catered to small, middle-market, and venture-backed firms; both recently sold securities for a loss to raise cash. Los Angeles-based PacWest was quick to distance itself from SVB, saying it was a "well- performing, well-diversified, full-service commercial bank." Western Alliance The regional lender tried to kill market panic, saying that it had cash reserves of more than $25 billion and had taken "additional steps to strengthen its liquidity position," including increasing borrowing capacity. Zions Bank Much like PacWest, Zions' focus on banking for small and medium-sized firms spooked investors and led to shares tanking. The Utah lender has also rushed to reassure clients it isn't at risk in the same way that SVB was. Fear and panic could lead to more bank runs. The US government hopes that its intervention will calm markets and restore faith in regional banks. Anxiety over lenders

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