Implications of Silicon Valley Bank collapse for the rest of the world

Editor's Note: The author is Mustafa Hyder Sayed, a policy analyst and executive director of Pakistan-China Institute. The article only reflects the opinion of the author and not necessarily of Gwadar Pro.

 

The Silicon Valley Bank (SVB) implosion, that shook the whole world, is a stark reminder that an unregulated, unchecked free market system is no longer sustainable in today’s world which is already afflicted with a struggling economy, global inflation, fluctuating oil prices, and political instability not to mention the Russia-Ukraine conflict. The SVB fiasco, which as the Wall Street Journal reports have suggested, was avoidable, since the SVB's dealings were "on the radar of the Federal Reserve for over a year", signaling pressing points for the United States and its economy, and also for Europe whose economy is closely intertwined with that of the US. Furthermore, the SVB's collapse has implications for the world at large.

The 2008-09 financial crisis, which is a dark hole in the history of financial markets, proved that complete deregulation of the market and unchecked capitalism were dangerous, putting at risk the majority of lower and middle-income strata while economic giants like AIG Insurance and Lehman Brothers, by and large, got away with either bailouts from the Federal Reserve, or with very little punitive action, because companies such as these, essentially led, preserved, influenced, and benefited from the financial architecture of the United States. Like General Motors, these companies were "too big to fail".

However, as the risk threshold of the global financial system has reduced in the post-pandemic world, the decisions (or lack thereof) of the Federal Reserve to ignore a collapse-in-slow-motion in front of their eyes is irresponsible at the minimum, if not negligent, as it impacts the rest of the world and countries that may not be in a position to absorb the shocks and shimmers emanating from the SVB collapse.

The Wall Street Journal's 26th March article, U.S. Bank Failures Pose Risk to Global Growth, suggests that the collapse of the SVB increases the risk of a global recession. As a reaction to the bank's collapse, it is expected that US lenders will hold back, and curtail lending both to domestic consumers and business as well as externally, that could lead to a negative "effect on global growth by pinching demand for other countries' goods and services, such as German cars, French holidays or Chinese-made electronics". Similarly, because of high dollar funding costs, banks in other countries may decide to limit lending to individuals and businesses, effectively transcending and exporting the economic crisis outside the United States. Eswar Prasad, a professor at Cornell University, suggests that such events like the collapse of the SVB could have "spillover effects across the globe", indicating that the problem is not over yet.

The SVB fiasco also exposes the unsustainability of the US financial system, which also exports to the rest of the world and calls for the need to review and revise the financial architecture of the world that a minimum common denominator of consensus is insured between major economies, so that such crises that impact all stakeholders are better preempted in the future.

The United States must understand that the current financial system that it has and also promotes in other countries serves only a minority of the highest income earners, and that system breeds inequality and marginalizes vulnerable communities. The fact that the SVB collapse has happened also demonstrates that no major lessons were learnt from the 2008-09 recession, as had the checks been in place, an implosion of this magnitude would not and could not have taken place. This is an opportune time for Washington to engage with Beijing, along with other economies like Germany, and through an inclusive, multilateral prism, take the initiative of forging a new financial architecture that underwrites and guarantees people, without discrimination of their income bracket, and has at its core a people-first approach.