Negative Cycle Must Be Stopped As Early As Possible

Editorial

12:30 JST, March 18, 2023

The collapse of U.S. banks has triggered widespread credit uncertainty in the United States and Europe. Authorities in each country should take all possible measures to prevent this from developing into a financial crisis.

Silicon Valley Bank (SVB), a medium-sized bank that is the 16th-largest by assets in the United States, collapsed on March 10. This is the second-largest bank failure in the U.S. history. On March 12, Signature Bank, the 29th-largest U.S. bank by assets, also failed.

The U.S. Treasury Department and the Federal Reserve Board have announced that they will fully protect the deposits at both banks.

In the United States, deposits of $250,000 (about ¥33 million) per person are protected in the event of a bank failure, in principle. By taking this unusual measure, the department and the Fed may be aiming to prevent credit uncertainty from spreading too quickly. The negative cycle must be ended as soon as possible.

SVB was engaged in lending mainly to startups in such areas as Silicon Valley, where there is a concentration of information technology companies.

The Fed’s rapid interest rate hikes caused the values of its bond holdings, including U.S. Treasuries, to fall, resulting in huge unrealized losses. Deposits were also said to be declining due to the deteriorating business performance of its borrowers.

SVB’s parent company had announced plans to sell securities and increase capital to improve its finances, but this is believed to have increased customers’ anxiety and accelerated the outflow of deposits, causing the bank to face cash flow problems.

Social media is said to have contributed to the spread of information that amplifies anxiety. U.S. authorities need to strengthen their supervision of financial institutions in light of such factors.

The effects of the collapse of the U.S. banks have also spilled over into Europe, where there is growing concern about the Swiss banking giant Credit Suisse.

Credit Suisse is strong in asset management for wealthy individuals, but has been in financial trouble due to such factors as huge losses incurred in transactions with a U.S. investment management company. On Wednesday, its share price plummeted when it was reported that its largest shareholder, a Saudi Arabian bank, refused to inject additional investment into Credit Suisse.

Credit Suisse has been trying to dispel concerns, announcing that it would borrow funds worth up to about ¥7 trillion from the Swiss central bank. Authorities must make efforts to provide support so that the crisis at Credit Suisse, one of the world’s leading financial institutions, does not shake the global financial system.

The impact on Japanese financial institutions is limited at this time, but many regional banks have invested in U.S. Treasuries and other securities, amid investment difficulties caused by ultralow interest rates in Japan. Unrealized losses at regional banks are reportedly ballooning.

It has been claimed that U.S. financial authorities overlooked the potential risks involved in the latest bank failures. Authorities around the world, including those in Japan, need to reexamine the risks faced by financial institutions.

(From The Yomiuri Shimbun, March 18, 2023)