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Silicon Valley Bank, Why Are Only European Stock Markets Collapsing? Economist Baglioni: «The emotional reaction to the crisis will remain limited» – the interview

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The long wave of Silicon Valley bank failures turned into a nightmare day for European stock exchanges. the Ftsy Meb From Milan It closed down -4%, destroying more than 24 billion in capitalization. The same fate for other major European indices: -3% for the Frankfurt DAX, -2.9% for the Paris CAC 40 and -2.5% for the London FTSE 100. However, according to the economist Angelo Baglione, professor of monetary economics at the Catholic University of Milan, not to worry. “The European stock exchanges reacted almost emotionally. However, the European banking system is solid: there are no alarm bells or reasons for concern. The intervention of the US government also contributed to calming the markets and averting the spread of wildfires in the crisis. Over the weekend, Washington confirmed that deposits of all Silicon Valley bank customers — including companies — would be paid back. A line also claimed today by Joe Biden in his address to the nation.

Professor, why did the Silicon Valley bank fail?

“There is a problem at the root of its failure above all: the bank’s strong exposure to medium- and long-term government bonds. These are very sensitive securities to changes in interest rates, which – as we know – have grown quite a lot in the past year. In the United States, in particular, there was an increase of 4 1/2 points. This led to a decrease in the market price of securities and, accordingly, to a decrease in the value of the Svb portfolio. In recent weeks, checking account holders have started to get upset, until the actual bank run broke out.”

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Why could no one foresee this crisis?

There are responsibilities that need to be clarified. Obviously, for example, there was an administrative error. the administration The bank could have predicted a year ago what would happen with inflation and higher interest rates. Leaders could have taken precautionary measures, for example by selling some of these government bonds before they lost much of their value. Certainly, however, it will also need to point out the shortcomings of the oversight bodies.”

After the bankruptcy of Svb, the US government immediately intervened to avoid “infecting” other banks. Have we learned from the mistakes of the 2008 financial crisis?

The US government has moved quickly and decisively, especially with the guarantee of total deposits, including deposits over $250,000. It is a very important ruling that will cost the state coffers dearly. At the same time, it is a necessary step to prevent the crisis from spreading and to provide an even higher account than the current one. In 2008, as is known, a mistake was made: Lehman Brothers was left bankrupt by imposing large costs on its creditors. This was the detonator of the crisis that then led to Europe and we lost all confidence in the banking system.”

Could the collapse of the Silicon Valley bank have similar consequences? Or is it just a fleeting mess?

“Making forecasts is still difficult. From what we’ve seen so far, it appears that this issue is related to a very particular business model, associated with a sectorhigh tech California. As a result, I think other medium-sized banks will file for bankruptcy. But with the announcement of the deposit guarantee by the US government, the problem will remain narrow. I do not see the danger that the crisis will spread like wildfire ».

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How will monetary policy change interest rates?

“That’s a big question mark. Some say the Fed will now be more cautious about raising interest rates, as we’re starting to see a backlash. I don’t think there will be big changes in monetary policy, especially by the European Central Bank in Europe. The Bank is working “The Fed is committed to achieving two goals: price stability and full employment. It is Vigilance that should take responsibility for what happens after the bankruptcy of Svb ».

Brussels leaders ensure there are no consequences in Europe. So why does Wall Street hold and European stock markets collapse?

“European stock exchanges have almost suffered emotionally from this crisis. On the other hand, Americans have had more time to metabolize the reassurances of the last few hours, also thanks to time zone reasons. The hourly trend of the stocks should be taken with caution. That’s right: there was a negative reaction from the stock exchanges today, but I think the prices will recover. There is no reason to fear contagion of European banks.

Why is the Milan Stock Exchange suffering more than others?

«It is difficult to say, even if the differences with other European stock exchanges are not so obvious. Italian banks are certainly highly exposed to government bonds and this may have played a role. However, the fact remains that the case of Italian banks is very different from that of a Silicon Valley bank, so here too I think there will be a recovery of lost quotes. You don’t need to look at the daily performance of stocks: it’s a very short time horizon.”

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In recent days, the US government has publicly intervened to calm the markets. Should the European Union do the same?

So far there has been a reaction from the stock markets but for the European banking system there are no alarm bells and no bank run. Thus, the position taken by the supervisory authorities would be premature. The European Central Bank is right to intervene very wisely in public statements.”

How will the situation develop now?

“The most likely hypothesis is that after Svb Bank and Signature Bank, other banks will appear in the sector with similar problems. But I repeat, I think that the problem will remain confined to a few banks.

Cover image: EPA/CJ Gunther | A branch of Silicon Valley Bank in Wellesley, Massachusetts (March 13, 2023)

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