Domino Effect Feared After Collapse of Silicon Valley Bank, as First Republic Bank’s Shares Slump

On March 10, Council of Economic Advisers Chair Cecilia Rouse told reporters that US Treasury Secretary Janet Yellen was closely monitoring the situation concerning Silicon Valley Bank (SVB) after it collapsed earlier in the day.

The future of First Republic Bank - the 14th largest in the United States - has triggered concerns amid speculation of a “domino effect” in the wake of Friday’s bankruptcy of Silicon Valley Bank, media reported.

Specializing in supporting tech businesses, Silicon Valley Bank failed on March 10, and was taken into government control. Regulators marched in to seize its deposits, putting the brakes on the bank's 40-year stint. The bank's swift demise appears to have rattled other banks, with shares of First Republic sinking 50 percent the same day, according to media reports. Before the close of trading Friday, the drop was at 15 percent.

To allay fears, First Republic issued a statement on Saturday, cited widely by media outlets, assuring investors of "continued safety and stability and strong capital and liquidity positions."

"Sources beyond a well-diversified deposit base include over $60 billion of available, unused borrowing capacity at the Federal Home Loan Bank and the Federal Reserve Bank," First Republic said.

A silhouetted security guard talks on a telephone inside Silicon Valley Bank’s headquarters in Santa Clara, California on March 10, 2023.

© AFP 2023 / NOAH BERGER

Amid the "bank panic," US Treasury Secretary Janet Yellen, who had rushed to meet with banking regulators, offered reassurances to the public, saying the American banking system remains "resilient." Yellen said she had "full confidence in banking regulators to take appropriate actions in response."

"Our Treasury Secretary Yellen is closely tracking the developments with Silicon Valley Bank. We have every faith in our regulators," Council of Economic Advisers Chair Cecilia Rouse told reporters on Friday.

Full-On Financial Crisis?

Amid the turmoil of speculation as to a ripple effect, Peter Schiff, CEO and chief global strategist of Euro Pacific Capital, went on Twitter to warn that the US banking system was "on the verge of a much bigger collapse than 2008."

"Banks own long-term paper at extremely low interest rates. They can't compete with short-term Treasuries. Mass withdrawals from depositors seeking higher yields will result in a wave of bank failures," the American stock broker and financial commentator underscored.

Twitter screenshot of post by Peter Schiff, an American stock broker, CEO and chief global strategist of Euro Pacific Capital Inc.

© Photo : Twitter

The expert added that if more banks fail, like Silicon Valley, "the only way depositors are going to get their money back is if the Federal Reserve System (US central bank) prints it."

"Either the FDIC defaults and depositors lose their money, or the Fed bails out the FDIC with QE and deposits lose most of their value," Schiff tweeted.

Screenshot of Twitter post by Peter Schiff, CEO and chief global strategist of Euro Pacific Capital

© Photo : Twitter

Silicon Valley Bank’s collapse sent more than a ripple across the banking sector, with the KBW Bank Index plunging the most in a week since March 2020, according to reports. Shares of Western Alliance Bancorp. also witnessed a new low since November 2020, closing down 21 percent on Friday.

Macroeconomist Philip Pilkington also weighed in on social media, tweeting that "months of inflation denialism in financial markets likely means many, many portfolios with bond exposure geared toward perma-ZIRP (Permanent zero interest rate policy)."

Screenshot of Twitter post by Philip Pilkington, Irish economist working in investment finance.

© Photo : Twitter

Screenshot of Twitter post by Philip Pilkington, Irish economist working in investment finance.

© Photo : Twitter

According to Philip Pilkington, looking ahead, a worst case scenario could be "a full-on financial crisis."

Screenshot of Twitter post by Philip Pilkington, Irish economist working in investment finance.

© Photo : Twitter

On Friday, the Federal Deposit Insurance Corporation (FDIC) issued a statement saying that Silicon Valley Bank, Santa Clara, California, had been closed by the California Department of Financial Protection and Innovation. To protect insured depositors, the FDIC was setting up the Deposit Insurance National Bank of Santa Clara (DINB).

SVB, which had offered funding for 44 percent of all venture capital-backed tech and healthcare companies, as per its website, witnessed its shares sink 86 percent between early March 9 and the company's announced halt of trading Friday. The bank's demise has been linked to the Federal Reserve's aggressive interest rate hikes and soaring inflation in the US.