The domino effect of silicon valley Bank's bankruptcy and the role of FED's monetary policy

Abstract

This paper examines the spillover effects of bankruptcy by important tech industry banks—Silicon Valley Bank (SVB), Silvergate Bank, and Signature Bank—on the top 10 institutions in the MSCI Bank Index and the role that monetary policy by the US Federal Reserve (the Fed) played in this contagion, using Dynamic Conditional Correlation-Exponentional Generalized Autoregressive (DCC-EGARCH) and time-varying Granger-causality models. Our findings show that the dynamic conditional correlations among the banks were higher during the period of the SVB crisis, implying the presence of financial contagion from the bank's bankruptcy due to uncertainty triggered by its collapse. Financial contagion emerges between SVB and the top 10 banks, and the degree of contagion rises during the crisis period. Moreover, the Fed's monetary policy plays a significant role in contagion due to bank failures. The deepening of financial contagion followed the Fed's increases in the federal funds rate to combat inflation.