Last Friday, the banking regulator of California shut down Silicon Valley Bank and appointed the Federal Deposit Insurance Corporation as receiver of its assets.
The sudden collapse tech and climate startup bank was quickly labeled the biggest bank failure since the 2008 crisis and the second-biggest in history. And as it fell, it took oil prices with it.
Government officials, including the president himself and the treasury secretary, have assured the public there is no reason to worry about their deposits in other banks. In fact, the latest media reports about SVB also say depositors will be able to get their money this week.
A run on banks will, in all likelihood, be averted. But fears of an economic slowdown in the world’s largest economy will likely deepen and extend, as indicated by traders’ rush out of oil in the wake of the SVB collapse.
On Tuesday, Brent crude traded below $80 per barrel for the first time since January. West Texas Intermediate had slipped to less than $71 per barrel. The international benchmark had shed more than $5 since Friday, and so had the U.S. benchmark.
The main reason behind the drop in prices appears to be linked to the fact that among the causes of the Silicon Valley Bank crash, analysts noted the Federal Reserve’s aggressive rate hikes over the past year. In a bid to tame a worryingly high inflation rate, the Fed imposed a series of rate increases that, among other things, hurt many of SVB’s startup clients. Related: Spain Takes 84% More Russian LNG Than Before Invasion
Not only this, but the rate hikes also hurt the profitability of Treasury bonds, to which Silicon Valley Bank appeared to have had significant exposure. This exposure and the Fed’s rate policies resulted in Treasury bond losses of $1.8 billion for SVB, according to Reuters.
It is all too easy for an oil trader to extrapolate from the situation. If one bank that does the usual things a bank does, even if it has a disproportionate exposure to startups active in the climate change area, can collapse under the weight of rate hikes, which one will be next?
They didn’t have to wait long for the answer. The next one was Signature Bank, whose customers heard the SVB news on Friday, made a run on the bank, withdrew deposits worth some $10 billion, and by Sunday, the authorities had to interfere and seize the bank in what was quickly dubbed the third-largest bank collapse in U.S. history.
That makes two of the top three banking collapses in U.S. history happening within a couple of days of each other. For all the politicians’ assurances to the public that there is no reason to worry, there are bound to be a lot more people who will be withdrawing their money from their banks in the coming days. Uncertainty will spike. And so will doubts about the immediate future of oil demand.
For most of the past year, after the initial price spike following the Russian invasion of Ukraine, the price of crude has been relatively stable, pushed up by expectations of tight supply and down by economic growth worries. Every time there was news in one of these areas, prices reacted accordingly as they are reacting now.
Runs on banks suggest economic troubles on the road ahead and when there is a suggestion of economic troubles on the road ahead, oil prices drop. How low they will go or how long they will stay low depends on what the next days bring—gradual calming of the U.S. banking waters or yet another collapse to add to historical records.
By Irina Slav for Oilprice.com
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