⭐𝙏𝙝𝙚 𝙙𝙞𝙛𝙛𝙚𝙧𝙚𝙣𝙘𝙚 𝙗𝙚𝙩𝙬𝙚𝙚𝙣 𝙎𝙑𝘽 𝙖𝙣𝙙 𝙇𝙚𝙝𝙢𝙖𝙣⭐

The current failure of SVB has everyone worried about a repeat of the GFC in 2008. Allow me to share the main difference between SVB and Lehman since I've traded through 2008.

SVB is not an investment bank. It is a traditional bank that takes deposits and makes loans. The unique feature is that it mainly serves silicon valley startups. Lehman is an investment bank. It acts as the counterparty for many financial institutions like big hedge funds and other banks. As such, if Lehman fails, it would set off a domino effect for those counterparties. This is exactly what happened when the Fed allowed Lehman to fail. It is also difficult to bail out Lehman because it would mean the Fed had to step in for Lehman to make good all those trades with other parties. This is not only risky but also unpalatable to taxpayers.

In the case of SVB, it is more clear-cut because the Fed only had to guarantee the depositors' money by extending loans, hence acting as the lender of last resort. Indeed, this is the purpose of the Fed. Shareholders and debt-holders of SVB bear the full brunt of their investing decisions. There is no other counterparty risk involved.

Post-GFC, investment banks are more careful in managing risk, and financial oversight is stricter. So far, the other banks that have closed are also similar to SVB which is why I do not think we will see a repeat of GFC. However, this regional banking crisis will hurt the real economy. This may just be what's needed to bring inflation down.

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