A capital crisis in Silicon Valley Bank is causing a sharp selloff in banking stocks worldwide.
US President Biden issued a warning for the need to raise the debt ceiling, considering that default and lack of funds will lead to a great danger threatening the US and global economy. Similarly, US Treasury Secretary Janet Yellen, warned that failure to increase borrowing may lead to default on US debt, which could create a global financial crisis and also cause a sharp rise in interest rates.
Global stock markets also incurred significant losses this week, led by stocks in the financial and technology sectors, with increasing concerns that rapidly rising interest rates will affect the prospects for global growth and in particular, the liquidity levels of banks, with the MSCI Europe Banks Index declining by 3.8%, its biggest loss in 9 months.
US stock indices also fell at their highest pace in several months amid a widespread sell-off following concerns about the US banking sector, after regulators were forced to close Silicon Valley Bank (SVB) on Friday.
The assets of SVB amount to $209 billion, which means that this process will be the largest bankruptcy since the global financial crisis in 2008, which erupted after the bankruptcy of Lehman Brothers, whose assets at the time totaled around $639 billion. The collapse of Lehman and its after effects hindered the global economy for several years.
This time around, economists ruled out the transmission of SVB crisis to other major banks such as JP Morgan and Morgan Stanley due to their financial solvency strength and their diverse customer bases.
Still, liquidity risks amongst banks has risen after the successive increases in interest rates. Increasing borrowing costs has brought about hardships for startup companies on the one hand and a decline in the value of bonds owned by banks on the other. However, the Federal Deposit Insurance Corporation FDIC warned that potential bank losses in this regard reached upwards of $620 billion.
Away from the details of the SVB crisis, the US economy and its direct impact on the global economy is facing a set of major challenges, summarized in the following points:
- The success of the US political and financial administration in increasing the borrowing ceiling, which currently stands at $31.4 trillion, and its commitment to paying its debts on time.
- The extent of the effectiveness of the financial conditions and requirements imposed by the regulators on US banks after the financial crisis in 2008, and whether they will play their role in terms of the risks of SVB infection spreading to the rest of the banking sector, especially the major banks.
- To what extent will the US Federal Reserve continue raising interest rates to control inflation without causing a recession and without causing further complications in the financial matters of companies and avoiding the risks faced by banks?
The Federal Reserve announced on its official website that an extraordinary meeting would be held on Monday 13 March 2023 to review and determine the advance and discount rates that will be imposed by the Federal Reserve banks. The outcome of the meeting will be announced with an official statement that will be published on the Federal Reserve’s official website, noting that The Federal Council is scheduled to hold its meeting from 21 to 22 March to determine its next interest rates, amid expectations of an increase between 25 - 50 basis points.
Figure 1: SVB Price Chart, Source: MetaTrader 5
The above figure shows the decline SVB Financial Group’s share price by more than 60% during last Thursday's trading session, closing at $106. The attached chart shows us the presence of important historical support near the $75 per share level.
The liquidity crisis of SVB has already affected banking stocks globally, with the crisis wiping out more than $100 billion within two days from the sector. The repercussions from the bank’s collapse, which had assets in a number of countries, began to spread all over the world.
Warnings suggest that the greatest danger will be for emerging companies as a result of liquidity issues and difficulty in obtaining financing.
Figure 2: Price Charts of Different Arab Stock Indexes, Source: MetaTrader 5
In the Arab world, the major indices in most Arab stock markets declined in the first trading sessions of this week. The Amman Stock Exchange index declined by 2.25%, the largest daily decline since March 2020. The Egyptian Stock Exchange index also declined more than 3%, while the Saudi index dropped by 0.76%.
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