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The Silicon Valley Bank experienced a collapse last Friday, March 10, at a historic pace. This could have repercussions in Mexico
The Silicon Valley Bank (SVB) experienced a collapse last Friday, March 10, at a historic pace. In just 48 hours, it destabilized the banking system in the United States. Investors are now wondering if its disappearance could trigger a broader banking collapse at an international level, as confidence in banking institutions comes into question.
The U.S. government has intervened to guarantee customer deposits, but the fall of SVB continues to impact global financial markets. Another action taken by Mexico’s neighboring country was the closure of Signature Bank, a regional bank that was on the verge of collapse and whose deposits have already been guaranteed.
U.S. President Joe Biden publicly announced to American citizens that the banking system was safe, and that everything necessary was being done in the face of the largest collapse of an American bank since the international financial crisis of 2008.
The Silicon Valley Bank crisis can affect Mexico
In the Mexican context, the collapse of Silicon Valley Bank has generated some uncertainty in financial markets and has raised concerns among investors. Despite the Mexican economy being in a stronger position than in the past, the SVB situation could have a significant impact on the country’s economy, particularly in the technology sector.
The technology sector in Mexico has grown steadily in recent years, driven by an increase in investment in new startups and greater access . Technology companies are an important source of employment and economic growth in the country, so any disruption in the sector could have a negative effect on the Mexican economy.
In this context, it is important to note that Mexico’s banking sector is in a relatively strong position. Mexican banking institutions have demonstrated resilience in the past, even during the global financial crisis of 2008.
The national currency has performed well in recent months, reaching a value of up to 17.95 per dollar, something that had not been seen since 2017. However, from Friday, March 10 to Monday, March 13, the peso depreciated by 2.3% to reach 18.92 units per dollar, a behavior associated with the collapse of Silicon Valley Bank and the climate of uncertainty experienced in the country’s main trading partner.
The Bank of Mexico believes that although the banking crisis in the United States will wreak havoc on investments, making them more cautious in the short term, the situation in the country is not devastating. On the other hand, Monex Financial Group pointed out that the SVB case could be just the tip of the iceberg of a challenging financial environment for this year, mainly due to a possible domino effect at an international level.
Gabriela Siller, Director of Economic Analysis at Grupo Financiero BASE, pointed out that Mexico could be affected by the interest rate differential, which could widen as inflation in the country remains at high levels. In addition, the volatility of the exchange rate, the possibility of greater inflationary pressures due to exchange rate volatility, lower export growth, and lower growth of remittances could also impact Mexico.
Inflation and risky investments are the main factors behind the collapse of SVB
Just before its collapse, the Silicon Valley Bank was the 16th most important commercial bank in the United States since its founding in 1983. A key part of its operation was providing banking services to nearly half of U.S. venture-backed startups.
With a presence in Germany, Canada, China, Denmark, Ireland, Israel, the United Kingdom, and Sweden, SVB greatly benefited from the explosive growth of the technology sector in recent years, driven by ultra-low borrowing costs and a surge in demand for digital services propelled by the Covid-19 pandemic.
At the end of 2019, the bank’s assets, including loans, tripled to $220 billion from $71 billion in late March of last year. Deposits skyrocketed from $62 billion to $198 billion during that period, with the main customers being technology companies mostly located in the state of California.
In this scenario, SVB suddenly collapsed within a span of just 48 hours as clients withdrew their assets in what is known as bank runs. However, the origin of this culmination dates back a few years when SVB, like other banks, decided to invest billions in U.S. Treasury bonds during a period of ultra-low interest rates, seeming like a safe bet that quickly collapsed when the Federal Reserve aggressively raised interest rates to counter inflation.
As interest rates increased, the value of bonds fell, and this increase eroded the value of SVB’s portfolio during the week prior to the collapse. The portfolio yielded an average return of 1.79%, well below the 10-year Treasury yield of around 3.9%, according to Reuters.
Simultaneously, due to the increase in interest rates by the Federal Reserve, loans became more expensive, leading technology companies to allocate more resources to debt payments. In addition, they encountered difficulties in obtaining new venture capital funds. As a result, companies had to resort to SVB deposits to finance their operations and expansion.
Most of the deposits made in Silicon Valley Bank were corporate accounts, whose balances exceeded the insured limit of $250,000. As a result of its collapse, it is estimated that over $150 billion in deposits have been frozen in bankruptcy, which could prevent startups and other businesses from accessing their funds for a long period.
Some of the companies affected by the banking crisis were Roku, Circle, Roblox, BlockFi, Compass Coffee, Camp, Axsome Therapeutics, among others. According to the regulatory letter from the California Department of Financial Protection and Innovation, SVB customers withdrew the unprecedented amount of $42 billion in deposits at the end of Thursday.
Do you think the banking crisis will impact Mexico?
Sources: CNN, Los Angeles Times, Expansión, El Universal, Independent, Milenio, El Financiero.