SVB Bank Bankruptcy Summary, Second Lehman Situation (Cause and Impact)

SVB Bankruptcy, Second Lehman Crisis SVB Silicon Valley Bank in the United States closed over the weekend. Sixteen U.S. banks with total assets of $209 billion went bankrupt in just 44 hours. The bankruptcy is the second-largest in U.S. history, and the first is the Washington Mutual, which collapsed during the 2008 financial crisis. As a result, a financial crisis, commonly called the Lehman crisis or the Great Depression, was naturally summoned. The 2008 U.S. financial crisis, also known as the Great Depression, was one of the most serious economic crises of the 21st century. It is a combination of factors such as excessive loans, low interest rates, housing market speculation, and regulatory oversight failure. The crisis has had a profound impact on the global economy, leading to massive job losses, business failures, and a sharp decline in global economic activity.

Causes of the 2008 U.S. Financial Crisis

(1) Excessive Lending and Borrowing

One of the primary causes of the financial crisis was the practice of excessive lending and borrowing. Many banks and financial institutions had adopted a liberal lending policy, where they offered easy credit to borrowers who did not meet the standard requirements for a loan. Borrowers, in turn, took advantage of this policy to take out loans they could not afford to repay. 

(2) Low Interest Rates

Another significant cause of the financial crisis was the low-interest rates that were prevalent in the U.S. at the time. In 2001, the Federal Reserve lowered interest rates to stimulate the economy following the 9/11 terrorist attacks. The Fed continued to keep rates low for several years, leading to a borrowing frenzy that created a housing bubble. 

(3) Housing Market Speculation

As a result of the low-interest rates and easy credit, the U.S. housing market experienced a significant boom. This led to an increase in home prices, which attracted investors looking to make a quick profit. Many investors began buying homes and flipping them for profit, creating a speculative bubble in the housing market.

(4) Regulatory Oversight Failure

Regulatory oversight also played a role in the financial crisis. The financial industry had become increasingly complex, and regulators had not kept up with the pace of change. As a result, many financial institutions engaged in risky behavior, including taking on too much debt and making risky investments. The lack of regulatory oversight also allowed some financial institutions to engage in unethical practices, such as predatory lending and subprime mortgages.

Effects of the 2008 U.S. Financial Crisis

(1) Massive Job Losses

The financial crisis led to massive job losses, with many companies forced to lay off workers due to the economic downturn. The unemployment rate in the U.S. rose to a high of 10% in 2009, and it took several years for the economy to recover fully. 

(2) Business Failures

The financial crisis also led to many business failures, with companies in the financial, automotive, and construction sectors among the hardest hit. Many businesses that relied on credit lines were unable to secure funding, and many others were forced to close their doors due to decreased consumer spending. 

(3) Decline in Economic Activity

The financial crisis had a significant impact on global economic activity. Many countries experienced a sharp decline in economic growth, with some, such as Greece and Spain, experiencing a severe recession. The crisis also led to a decline in international trade and investment, as many businesses were unable to secure funding for expansion.

(4) Government Bailouts

To prevent the collapse of the financial system, the U.S. government initiated a series of bailouts for banks and financial institutions. The government also provided stimulus funding to help jumpstart the economy. The bailouts and stimulus packages were controversial, with many people questioning whether they were necessary and whether they set a dangerous precedent.

(5) Public Distrust of Financial Institutions

The financial crisis also led to a significant loss of public trust in financial institutions. Many people blamed the banks and other financial institutions for the crisis and believed that they had acted irresponsibly. The crisis also led to calls for greater regulation of the financial industry to prevent similar crises from occurring in the future.

Cause of SVB bankruptcy

The reason why Silicon Valley Bank collapsed is completely different. The bank has been operated by giving deposits and loans to startups in Silicon Valley and investors investing in them. The problem is that they have not found a suitable investment destination to invest the money they received from their deposits. So what I found was U.S. government bonds. The interest rate is about 1%, but it was bought with confidence because there would be no loss unless the U.S. fails. However, the U.S. central bank raised its key interest rate at an unprecedented rate, causing problems. The benchmark interest rate and government bond prices are generally inversely proportional. As the U.S. central bank raised its key interest rate to 4.75% a year for the first time in a year, government bond prices plummeted. It would be good if it ended here, but the problem grew as IT companies, which had been suffering from financial difficulties in the wake of the recent economic recession, asked for some money back. This is because Silicon Valley Bank mainly bought long-term government bonds. You can recover your old price by just waiting for the draft electronics. However, the people who deposited the money in the bank did not wait. From the bank's point of view, I bought a 1 billion won apartment in Gangnam, Seoul, and tried to wait for it to rise soon even if it fell by 200 to 300 million won, but suddenly the moment came when I had to dispose of my house at a low price. When the news of the bank's instability was heard, customers asked for money, and the bank threw away government bonds at a loss, which eventually led to bankruptcy.

In conclusion

financial crisis was a complex event with multiple causes and far-reaching effects. It highlighted the dangers of excessive lending and borrowing, low-interest rates, and regulatory oversight failure. It also underscored the interconnectedness of the global financial system and the importance of international cooperation in responding to economic crises. The lessons learned from the 2008 financial crisis have led to significant changes in the financial industry and regulatory landscape. The Dodd-Frank Wall Street Reform and Consumer Protection Act was enacted in 2010 to address some of the regulatory gaps that contributed to the crisis. The act created new agencies, such as the Consumer Financial Protection Bureau, and imposed stricter regulations on financial institutions. However, some experts argue that more needs to be done to prevent future financial crises. They argue that the financial industry is still too complex and that there is a need for more transparency and accountability. They also believe that the government should be more proactive in regulating the financial industry and in addressing income inequality, which can contribute to economic instability. Overall, the 2008 U.S. financial crisis was a stark reminder of the fragility of the global financial system and the need for greater vigilance and regulation. While the crisis caused significant pain and suffering, it also led to important reforms and lessons that can help prevent similar crises from occurring in the future.