The causes of the SVB and Signature failures differ from the causes of the 2008 financial crisis. The 2008 financial crisis resulted from a myriad of factors, including easy credit conditions in the housing market and increasing subprime loans, the transfer of risk from lenders to investors via mortgage-backed securities, the popularity of adjustable-rate mortgages, and reduced housing values resulting from rising mortgage rates. Several major banks made risky subprime loans and investments in mortgage-backed securities tied to subprime loans. When rising mortgage rates caused the defaults on adjustable-rate mortgages to significantly increase and home prices plummeted, many subprime loans and mortgage-backed securities were virtually worthless. A massive $700 billion bailout of the banking industry (including depositors and investors) was approved by Congress in 2008. The fear was that decreased liquidity in the mortgage market, caused by the write down of mortgage securities and consequently bank assets, would dry up funds available for banks to lend. This had the potential to have a significant, detrimental impact on the economy – and other financial institutions. As a result of the financial crisis, the Dodd-Frank Wall Street Reform and Consumer Protection Act was passed by Congress in 2010 to increase government oversight and strengthen the financial system. However in 2018, Congress passed the Economic Growth, Regulatory Relief, and Consumer Protection Act, which rolled back significant portions of the Dodd-Frank Act. In particular, the new law eased the regulations for small and regional banks (like SVB at the time) by increasing the asset threshold for the application of certain standards, stress test requirements, and mandatory risk committees. The SVB failure will no doubt raise concerns over the regulation (or lack thereof) of smaller financial institutions. In addition, future discussions may include how to prevent company execs from selling their stock before the financial struggles of a company are publicly disclosed. The CEO of SVB sold $3.5 million of SVB stock on February 27, before the $1.8 billion loss on bonds and proposed stock offering were publicly announced. The SVB stock price was $288 on February 27 before tanking to $106 on March 9 just prior to its failure. The Debt Ceiling: An Overview The debt limit is the total amount of money that the United States government is authorized to borrow to meet its existing legal obligations, including Social Security and Medicare benefits, military salaries, interest and principal payments on the national debt, tax refunds, and other payments. The debt limit does not authorize new spending commitments, which are determined by the Congress and president in the federal budget process. Federal budget deficits are financed through the issuance of federal (Treasury) debt. The debt limit allows the government to finance existing legal obligations that Congresses and presidents of both parties have made in the past. According to the U.S. Treasury, “Congress has always acted when called upon to raise the debt limit. Since 1960, Congress has acted 78 separate times to permanently raise, temporarily extend, or revise the definition of the debt limit – 49 times under Republican presidents and 29 times under Democratic presidents. Congressional leaders in both parties have recognized that this is necessary.” Not raising it would mean the U.S. would default on outstanding debt and not be able to pay existing legal obligations, which would have significant, negative, economic consequences. The debt ceiling is set by law and historically has been periodically increased to allow the financing of government operations. According to the Congressional Budget Office , the Bipartisan Budget Act of 2019 (enacted in August 2019) suspended the limit through July 31, 2021. On August 1, 2021, the debt limit reset to the previous ceiling of $22.0 trillion, plus the cumulative borrowing that occurred during the period of suspension. The debt ceiling was raised in December of 2021 by $2.5 trillion to $31.381 trillion, which is expected to last until approximately the summer of 2023. There is a link between federal budget deficits and the amount of federal debt outstanding. When a federal budget deficit occurs, it is financed through the issuance of federal debt (Treasury securities). Ideally, when excellent economic growth occurs resulting in low unemployment, a budget surplus occurs. This potentially allows debt to be repaid, or at the very least, not have to be increased. During periods of economic downturns with relatively high unemployment, budget deficits ensue as tax revenues fall and government spending may increase to stimulate the economic recovery. It isn’t very different from personal finance. When personal economic times are good, you want to pay down debt and save. If you don’t, you never will. When personal economic times are bad, you may have to
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Center for Business and Economic Insight
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