How the failure of American banks SVB and Signature Bank may affect Brazil

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This weekend, attention turned to the financial market with the failure of two American banks within a span of three days. How can this affect Brazil? This weekend, attention turned to the financial market with the failure of two American banks within a span of three days. On Friday (10/03), Silicon Valley Bank was taken over by controllers and declared bankrupt when the bank found itself unable to return the deposited money after a rush of customers to make withdrawals. On Sunday, another bank that was on the verge of collapse, Signature Bank, was also taken over by controllers. SVB was the 16th largest bank in the US and one of the top banks used by technology companies and startups, which flourished in the US in the so-called Silicon Valley. It came to be controlled by the FDIC (Federal Deposit Insurance Corporation), a fund similar to the Brazilian Fundo Garantidor de Crédito, that is, insurance that guarantees customer credit if banks are unable to meet their commitments. Signature Bank, which operated in the cryptocurrency sector, is also guaranteed by the FDIC and came under the control of New York controllers. The FDIC guarantees up to $250,000 per customer. However, most of the assets in the SVB (about 90%, according to the bank’s 2022 data) were above this amount, that is, they were not covered by insurance. On Sunday, the Fed (the US central bank) and the US Treasury Department released a joint statement with the FDIC saying that government institutions must fully insure SVB deposits, including those above the insurance limit, to “protect the US economy” and strengthen the banking sector. The American government acted quickly to avoid both the bankruptcy of companies that had invested in the SVB and a crisis of confidence – which in turn could generate a generalized run on banks and a systemic crisis. However, the market woke up apprehensive and European banks started falling on Monday (13). Understand how the situation can affect Brazil. Did Brazilian companies have bank accounts? In Brazil, several fintechs (financial services that make use of new technologies) rushed to issue notes saying that they are not exposed to the bank, that is, they will not be affected by the breakdown of the SVB. This was the case with digital bank Nubank, which sent a statement to shareholders saying that neither the main company Nu Holdings nor its subsidiaries are exposed to the crisis. The digital bank C6 Bank and the payment company PagSeguro also released statements stating that they are not exposed, that is, they will not be affected. Financial news outlet Bloomberg Linea said some Brazilian startups had more than $10 million in the bank. Companies – not just Brazilian ones – were able to withdraw the US$ 250,000 guaranteed by the FDIC this Monday, but payment of the rest should take a few more weeks and there is a risk of losing 10% to 20% of the amounts. For economist Luís Alberto de Paiva, director of Corporate Consulting, the failure of banks should increase investor distrust. “Signature Bank operated with cryptocurrencies, a sector that has not had a good track record in Brazil. [A quebra do banco] it will drive even more investors away from this area”, he says. Effects for Brazil The crashes also raised concerns about the effects that a crisis in the US could have on the Brazilian economy more broadly. But the rapid action of the FED and the US government seems to have stopped the crisis in the US, assesses Francisco Nobre, an economist at XP Investimentos, preventing a rush to withdraw assets from smaller or niche banks. In Nobre’s analysis, a systemic crisis is not the most likely scenario, also because of several changes introduced in the financial system after the 2008 crisis, which generated a series of regulations to guarantee greater security. In addition, he explains, the banks that failed represented only 2% of the financial system. Even without a crisis scenario, the events of the last weekend should have some effect on the economy. For Nobre, it is expected that the stress generated in the financial market will reduce the need for the US central bank to have a more aggressive interest rate policy, allowing the rate not to rise so much. “We expect that there will be a faster easing of interest rates, which will have repercussions on asset and stock prices as a whole, in addition to influencing economic activity”, he explains. “For Brazil, this could translate into an increase in the interest rate differential. On the other hand, bankruptcies generate an aversion to global risk, which is negative for the flow of capital to countries like Brazil”, says Nobre. That is, for now, it seems that there is a balance between the trends that could affect the exchange rate in different directions and the impact on the exchange rate should be neutral, evaluates the economist. “The impact would be greater if the crisis turned out to be deeper. The situation still needs to be monitored very closely, but the expectation is that the impact for Brazil will be small”, he says. On Monday, finance minister Fernando Haddad said that what happened to the banks “is serious” and that it is not yet clear what the effects will be on the peripheral economies (which include Brazil). But he said that the Central Bank should take some action in relation to them. The minister also said that he is monitoring the situation with the BC and Brazilian banks. What happened to the banks? The collapse came after a statement from the SVB announced that its financial situation was fragile after the loss of money caused by the sale of assets. The bank had made investments in government bonds, private bonds and mortgages with long-term maturity, that is, which give a certain return if held for many years but give a lower value if redeemed in the short term. Part of these assets devalued with the rise in interest rates in the US, leading to inquiries and withdrawals from many customers. As a result, in an attempt to replenish its capital, the bank had to sell part of its long-term assets ahead of time, incurring a loss. The announcement that it needed to raise money to replace this loss alienated investors and sent customers rushing to withdraw their funds at a faster rate than the bank was able to handle, leading to the collapse. For Francisco Nobre, an economist at XP, the risk that other banks may face similar problems is not so great because the profile of the two banks that failed was very specific and very different from that of most other financial institutions. “Banks’ balance sheets had a composition that exposed them to much more risk than other institutions,” he says.

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