Silicon Valley Bank’s Bankruptcy: 100% guaranteed no Bailout because of the Dodd-Frank Act.

https://medium.com/the-capital/silicon-valley-banks-bankruptcy-100-guaranteed-no-bailout-because-of-the-dodd-frank-act-58f6ab7fcdb3?source=rss----c4037b4d8519---4

The Silicon Valley Bank’s bankruptcy had sent ripples across the financial landscape, striking fear into the hearts of its customers and investors alike. Yet, amidst the uncertainty, one thing is certain: there will be no bailout.

The Dodd-Frank Act, a federal law passed in 2010 to respond to the catastrophic 2008 financial crisis, guarantees this assurance. The Dodd-Frank Act ensures the orderly liquidation of failing financial institutions, preventing any disruption to the financial system. It is a shield against any kind of avarice, providing a safe haven for those who fear the perils of the past.

The FDIC has the authority to assist failing banks, including injecting capital or providing guarantees, but the Act ensures that taxpayer funds are limited. Instead, the shareholders and creditors will bear losses first. It is a far cry from the bailouts of the past, where taxpayers had to foot the bill for the failures of the banks.

In the case of Silicon Valley Bank’s bankruptcy, the shareholders and creditors, not taxpayers, will bear any losses incurred during the liquidation process. With only 2.7% of SVB deposits under $250,000 FDIC insurance protection, there will be no privatized wins and socialized losses this time. The Dodd-Frank Act is a 100% guarantee for that.

The OLA provision of the Dodd-Frank Act prohibits using taxpayer funds to bail out failing financial institutions, creating a clear and equitable distribution of the costs of a bank’s failure. It is a significant departure from the past, reflecting the public outrage and calls for reform that followed the 2008 financial crisis.

The Dodd-Frank Act is meant to prevent another such disaster from occurring again. It creates a more transparent and fair system, preventing moral hazard, and the risk of banks taking excessive risks knowing that the government would bail them out if they failed.

The Silicon Valley Bank’s bankruptcy is not without consequences for its customers and investors. Losses may still be incurred during the liquidation process, and depositors may take some time to access their funds. But the Dodd-Frank Act provided a framework for an orderly resolution, which should minimize disruptions to the financial system.

In conclusion, the Silicon Valley Bank’s bankruptcy will cause fear and uncertainty, but the Dodd-Frank Act provided a shield against the perils of the past. It ensured that there would be no bailouts, protecting taxpayers from the excesses of the banks. It creates a more equitable system, preventing moral hazards and ensuring a fair distribution of costs.

About the Author

Patrick Mehrhoff, CEO & Founder, MEHRHOFF DIGITAL

Patrick Mehrhoff is the Founder and CEO of MEHRHOFF DIGITAL, a leading Marketing Consultancy for Financial Services. He has a proven track record of success, having established marketing departments for Swiss FinTech startups, MoneyPark and Crypto Finance, that generated exit values exceeding 400 million and valuations over two billion. Patrick is a German national, Certified FinTech Professional, and holds an MBA from the Power Business School.

About the Company

MEHRHOFF DIGITAL is the #1 trusted marketing consultancy for Financial Services, combining high-level strategy and creative imagination with meticulous execution, fueled by a results-driven and intuitive genius, reliable data, success-based performance, and outstanding conversational wit. We help Financial Services gain a competitive edge, driving MRR, PQLs, and MQLs with meticulously crafted marketing solutions, products, and services.

Check out our new platform 👉 https://thecapital.io/

https://twitter.com/thecapital_io

https://medium.com/media/3b6b127891c5c8711ad105e61d6cc81f/href


Silicon Valley Bank’s Bankruptcy: 100% guaranteed no Bailout because of the Dodd-Frank Act. was originally published in The Capital Platform on Medium, where people are continuing the conversation by highlighting and responding to this story.

Silvergate and Silicon Valley Bank: The Risks of HTM Investments for the Banking System

https://medium.com/the-capital/silvergate-and-silicon-valley-banks-bankruptcies-the-risks-of-htm-investments-7ea014277582?source=rss----c4037b4d8519---4

On Friday, Silicon Valley Bank, a 40-year-old institution, collapsed, causing the FDIC to take over and put nearly $175 billion in customer deposits under the regulator’s control. The bank’s failure is the second-largest in US history and the largest since the financial crisis of 2008. The move evokes memories of the global financial panic of a decade and a half ago but did not immediately touch off fears of widespread destruction in the financial industry or the global economy.

Shares of America’s banks saw a significant drop, with First Republic, PacWest Bancorp, Western Alliance Bancorp, and Signature Bank experiencing the largest plunges amid growing contagion concerns following the largest bank failure since 2008.

Source: TradingView

The looming Financial Crisis

As we approach the anniversary of the Great Financial Crisis, it’s concerning to see similar warning signs emerging.

The US Treasury yield curve has recently inverted to its deepest level since 1981, while bankruptcies filings in the EU and US have hit a high not seen since the GFC. This, combined with the diverging profitability between European and American banks, paints a bleak picture for the financial sector.

Source: Bloomberg

The Problem with Held-to-Maturity (HTM) Investments

One of the key contributors to this potential crisis is the outdated accounting treatment for banks’ held-to-maturity (HTM) investments. Banks purchase these securities to acquire predictable cash flow and meet liquidity requirements. However, the current accounting treatment for HTM investments is based on their original cost rather than their current market value. This creates a mismatch between the duration of the HTM investments and the short-term nature of bank borrowing, leaving banks vulnerable to losses on disposal if interest rates rise or market conditions change.

Source: Bloomberg

COVID and the lessons from the Lehman Brothers Collapse

The COVID-19 pandemic has caused loose credit practices similar to those leading to the subprime mortgage crisis and the 2008 financial crisis. Lehman Brothers also had a similar issue with their HTM investments, ultimately leading to their collapse and the global financial crisis. Banks holding risky loans and assets face substantial losses on disposal. The downfall of Lehman Brothers serves as a warning for banks to take timely action to mitigate risk and prevent bankruptcies.

Outdated accounting treatment for banks’ investments raises concerns about another financial crisis.

The outdated accounting treatment of HTM investments must be changed to avoid the overvaluation of bank assets and underestimation of risk exposure.

Silvergate and Silicon Valley Bank

This is precisely what happened to Silvergate and Silicon Valley Bank, who experienced significant losses on their HTM investments and were forced to sell, contributing to their bankruptcy. The weighted-average duration of Silicon Valley Bank’s HTM securities portfolio was 6.2 years on December 31, 2022, compared to 4.1 years on December 31, 2021, indicating a duration mismatch.

To prevent a similar wave of bankruptcies, banks must act now to tighten credit standards and diversify their investment strategies. Learning from history, we can see that an inverted yield curve and risky lending practices can lead to financial crises. Banks can mitigate risks and enable timely risk management by updating their accounting treatment for investment strategies.

The Contagion Effect: The Threat to Tech and VC/PE Industry

Source: Mehrhoff Digital

The potential contagion of Silicon Valley Bank’s bankruptcy to the tech and VC/PE industry is not just a hypothetical scenario — it’s a legitimate threat. A catastrophic event like this would have cascading effects on the entire market, ultimately leading to a widespread economic downturn.

The impact would be immense and long-lasting, as it would shake the very foundation of the tech and VC/PE sector, which is the backbone of innovation and growth. The potential implications of this doomsday scenario are almost too dire to contemplate: millions of jobs lost, countless startups shut down, and a wave of investor panic leading to a global recession.

About the Author

Patrick Mehrhoff, CEO & Founder, MEHRHOFF DIGITAL

Patrick Mehrhoff is the Founder and CEO of MEHRHOFF DIGITAL, a leading Marketing Consultancy for Financial Services. He has a proven track record of success, having established marketing departments for Swiss FinTech startups, MoneyPark and Crypto Finance, that generated exit values exceeding 400 million and valuations over two billion. Patrick is a German national, Certified FinTech Professional, and holds an MBA from the Power Business School.

About the Company

MEHRHOFF DIGITAL is the #1 trusted marketing consultancy for Financial Services, combining high-level strategy and creative imagination with meticulous execution, fueled by a results-driven and intuitive genius, reliable data, success-based performance, and outstanding conversational wit. We help Financial Services gain a competitive edge, driving MRR, PQLs, and MQLs with meticulously crafted marketing solutions, products, and services.

Check out our new platform 👉 https://thecapital.io/

https://twitter.com/thecapital_io

https://medium.com/media/3b6b127891c5c8711ad105e61d6cc81f/href


Silvergate and Silicon Valley Bank: The Risks of HTM Investments for the Banking System was originally published in The Capital Platform on Medium, where people are continuing the conversation by highlighting and responding to this story.