 "Silicon Valley Bank")
Economic expert and valuation guru, Aswath Damodaran said more Silicon Valley Bank (SVB) like crises are waiting to occur in the US.
The recent banking crisis in the United States that began with the SVB fallout brought in a major threat to the American economy. The crises also risked disturbing the financial sectors of other countries.
Damodaran in his latest blog has said that the US can witness more dominos falling like the SVB.
"More dominos are waiting to fall in the US banking business", the New York University professor wrote in his blog.
“There will be other dominos that fall, bank concentration (not profitability) will rise, systemic effects will stay small, accounting rules on the market will be tightened and regulators will add duration mismatch & deposit stickiness to the rule book," he tweeted while sharing the link to his blog.
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To understand banking crises, you have to start with the basic business of banking, and it is a simple one. Collect deposits from customers & invest those deposits in loans and securties; use the spread between interest income & expenses to cover losses. https://t.co/DOXKexcG3d pic.twitter.com/GdyvCDYml8
— Aswath Damodaran (@AswathDamodaran) May 6, 2023
Drifting "easy comes, easy goes", Damodaran further explained that the banks that have seen the most growth in deposits over the last five years are also the ones who have faced the greatest market cap loss.
“Breaking down banks based upon deposit growth over the last five years, it is clear that the market cap loss has been greatest at the banks that have seen the most growth in deposits. Easy come, easy go,"
In his blog, along with explaining how banks function, he also elaborated upon factors that actually lead to the fall of "too large to fail" banks.
He also explained the difference between the present banking crisis and the previous ones.
According to him, the SVB-led crisis “looks like a slow-motion car wreck" but lacks “systemic consequences of prior crises".
He says that the current banking crisis and the ones to come are more likely to redistribute wealth across banks than to create costs for the rest of the people.
