From Boom to Bust: Comparing the Collapses of Washington Mutual and Silicon Valley Bank
The 2008 financial crisis was a significant event that affected lots of banks, including Washington Mutual, one of the most effective savings and loan associations in the United States; on the other hand, the failure of Silicon Valley Bank in the United States is the current hot topic in the financial industry. The bank's loss has been connected to the Federal Reserve's interest rate hike, which resulted in a money crunch for a few of its customers. This review examines the essential elements leading to SVB & Washington Mutual's failure, the lessons found, and the ramifications for the banking industry.
The Rise and Fall of Washington Mutual
Washington Mutual had significant direct exposure to these subprime home mortgages, and as the real estate market decreased, the company suffered substantial losses. Despite efforts to protect a bailout, Washington Mutual was seized by the United States government and sold to JPMorgan Chase in the most significant bank failure in United States history.
The Role of Corporate Culture
Washington Mutual's corporate culture played a considerable role in its downfall. The business's sales-focused culture also led to neglect of risk management and underwriting standards, eventually leading to high direct exposure to subprime home mortgages.
Regulative Failure
The failure of Washington Mutual also highlighted the regulatory failures that added to the fiscal crisis. The Office of Thrift Supervision (OTS), the regulatory agency responsible for overseeing Washington Mutual, had a history of lax oversight and a culture of deference to the market it regulated. Despite whistleblowers' and examiners' caution, the OTS failed to take action against Washington Mutual's dangerous loaning practices. The agency's regulative failures were compounded by the lack of coordination and oversight at the federal level, which enabled risky loaning practices to go uncontrolled.
The Role of Federal Reserve's Interest Rate Hike for the SVB failure
The Federal Reserve's choice to raise the interest rate played a substantial role in the failure of Silicon Valley Bank. The interest rate trek made borrowing expensive, which made it challenging for innovative startups, the main clients of Silicon Valley Bank, to raise capital. This caused a money crunch for a few of its clients, who started pulling out cash, leading to the bank's downfall.
Impact on the Financial Industry
The failure of Silicon Valley Bank has had a substantial influence on the financial market. It has raised concerns about the vulnerability of banks that concentrate on providing to technology startups. It has also highlighted the importance of risk management in the banking sector. The failure of Silicon Valley Bank likewise underlines the need for banks to have appropriate capital reserves to hold up against market shocks.
Comparing the Washington Mutual failure to the Silicon Valley Bank failure
Several similarities and distinctions exist between the Washington Mutual (WaMu) collapse and the Silicon Valley Bank (SVB) collapse.
Resemblances in between Washington Mutual's failure to the Silicon Valley Bank failure:
Both banks were affected by the worldwide monetary crisis. WaMu collapsed in September 2008, while SVB collapsed in March 2023.
Both banks were heavily invested in dangerous possessions. WaMu had a considerable portfolio of subprime home loans, while SVB had an extensive bond portfolio yielding low returns.
In both cases, depositors started withdrawing their funds, which sped up the banks' collapse.
The Federal Deposit Insurance Corporation (FDIC) took over both banks and looked to offer their possessions.
Differences between Washington Mutual's failure to the Silicon Valley Bank's failure:
The size of the banks is significantly different. WaMu was one of the largest banks in the United States, with over $300 billion in possessions, while SVB had around $200 billion in properties.
The cause of the collapse is a bit different. WaMu's failure was due to its exposure to the subprime home mortgage market, while SVB's collapse was caused by the Federal Reserve's raising the interest rate and its customers dealing with a cash crunch.
The way regulatory authorities sold the banks' properties was different. WaMu's properties were sold to JP Morgan Chase for $1.9 billion, while the FDIC has announced that it will seek to sell SVB's possessions.
In summary, while risky financial investments and a run on deposits drove the Washington Mutual and Silicon Valley banks to collapse, they had different underlying causes and property sales processes.
The differences in the underlying reasons for Washington Mutual's failure to the Silicon Valley Bank's failure
The underlying causes of the Washington Mutual (WaMu) and Silicon Valley Bank (SVB) collapses were various. WaMu's failure was mainly due to its exposure to the subprime home loan market, which caused substantial losses for the bank. On the other hand, a combination of elements, consisting of the Federal Reserve's raising of interest rates, cash crunches faced by some of its clients, and a loss incurred from the sale of its bond portfolio, triggered SVB's collapse.
Property sales procedures
The possession sales processes for WaMu and SVB were likewise different. When WaMu failed, its properties were offered to JPMorgan Chase, which acquired WaMu's branches, deposits, and loan portfolio. The Federal Deposit Insurance Corporation (FDIC) facilitated and supported the sale. The FDIC also assumed responsibility for most of WaMu's liabilities.
In contrast, SVB's assets have yet to be offered as the FDIC put it under receivership. Under receivership, the FDIC takes control of the bank's operations and possessions and tries to sell them to other banks or financiers. The FDIC revealed that it would look to sell SVB's assets which future dividend payments might be made to uninsured depositors.
While WaMu and SVB experienced substantial failures, the underlying causes and possession sales procedures differed entirely.
The ramification on the economy of the US
The failure of any big bank can have substantial ramifications for the broader economy, and the collapse of Silicon Valley Bank is no exception. The bank's failure will likely disrupt the financial system, and the FDIC must work to ensure that depositors can access their funds.
In the short term, the failure of Silicon Valley Bank is most likely to hurt the stock exchange and could cause a broader financial slowdown. Investors might be more mindful, and there could be a decrease in investment in the technology sector. This might impact the overall economy, as technology firms have been a crucial motorist of financial growth over the last few years.
The failure of Silicon Valley Bank could also have ramifications for the regulative environment. The bank's collapse may result in an increased examination of the innovation sector, especially its funding practices. This might lead to improved policy and understanding of the market, which might have both positive and negative implications.
Overall, the failure of Silicon Valley Bank is likely a significant event for the US economy, and its ramifications will be closely seen by investors, regulators, and policymakers.
Lessons Learned from the SVB & Washington Mutual failure
On an associated but different note, the failure of Silicon Valley Bank has offered a key lesson in the significance of diversification in the banking sector. The SVB failure further underscores the importance of threat management in the banking sector and that banks need to have effective methods in location to recognize and reduce such considerable threats. Another lesson learned from the failure of Silicon Valley Bank is the significance of appropriate capital reserves.
To conclude on what transpired...
While the failure of Washington Mutual was an important event in the 2008 monetary crisis, highlighting the threats of aggressive lending practices and the requirement for strong risk management, corporate governance, and regulative oversight. The lessons learned from this case can help the banking market prevent similar future failures and promote greater stability and sustainability in the financial system.
The present failure of Silicon Valley Bank in the United States can be associated with numerous factors, including the Federal Reserve's interest rate hike and the bank's direct exposure to the technology startup market. The failure has considerably influenced the financial market, highlighting the importance of diversity, risk management, and appropriate capital reserves. It is a simple observation that no bank is too huge to fail and underscores the requirement for banks to be proactive and alert in determining and reducing threats.
The 2008 financial crisis was a significant occasion that impacted many financial institutions, including Washington Mutual, one of the largest savings and loan associations in the US; on the other hand, the failure of Silicon Valley Bank in the US is the current hot topic in the financial market. The failure of Silicon Valley Bank has also highlighted the need for banks to have sufficient capital reserves to stand up to market shocks.
Under receivership, the FDIC takes control of the bank's operations and possessions and attempts to offer them to other banks or financiers. The present failure of Silicon Valley Bank in the United States can be associated with different factors, consisting of the Federal Reserve's interest rate walking and the bank's direct exposure to the innovation startup market. It is a stark pointer that no bank is too big to fail and highlights the need for banks to be proactive and watchful in recognizing and mitigating threats.
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