Three takeaways from SVB for Latin America
The current banking crisis in the US and Europe could hit Latin America, with social media amplifying rumors and building on doubts people already have about their economic and political systems.
Three banks have fallen this month: Silicon Valley Bank, Signature, and Credit Suisse. For Latin America, the fall of these banks is likely to impact short-term access to finance and the region’s economies. In addition, they should serve as a warning for how social media can speed up and encourage economic crises.
1) Operations and funding will become more difficult for LatAm tech and fintech companies. Many Latin American startups with companies based in the US had their money in SVB. Some were required to have bank accounts at SVB as a condition of their loans or VC agreements. Some of those agreements included SVB’s work with the Inter-American Development Bank, but in many cases, it was simply the bank of choice by those in the tech community and the one that made banking easiest for Latin American tech companies that needed US accounts.
The bank crises will make it harder for Latin American companies to raise money in the United States and operate across borders. Iupana and Rest of the World both covered these challenges this past week.
There are already companies trying to turn this crisis into an opportunity, promoting Latin American alternatives to SVB. While I'm hopeful a few succeed, the short-term outlook is negative for the sector.
2) The banking crisis could hit the region's economies. While officials stressed that this is not the most likely scenario, the potential for slowdown or even “financial contagion” spreading across the region was one takeaway from comments coming out of the Inter-American Development Bank meetings in Panama in recent days. Growth could slow and some of the region's weaker banks could see threats if investors perceive that they face similar risks to the banks that already collapsed.
Most of the region isn't heavily invested in the technology sector and it is not a significant portion of jobs or wealth creation. Instead, this is classic "the US/Europe sneezes and Latin America catches a cold" territory. Conditions are going to drive investors towards safer assets and Latin American economies are going to be perceived as riskier and weaker, whether that is fair or not. 2023 was already set to be a very difficult year for Latin America and the current banking crisis may confirm those pessimistic predictions.
3) Social media can cause or speed up bank runs and financial systems need to be prepared. Social media played a role in placing pressure on SVB and Credit Suisse in recent months and then sped up the crash of both banks as they each faced crisis this month. Now, looking at current events, ask yourself how Argentina's 2001 economic collapse would have played out differently in an era of WhatsApp and Twitter. The most likely answer is that the total collapse would have occurred months earlier and more quickly than it did.
For example, two weeks ago we wrote about an emerging potential economic crisis in Bolivia including how the perception of the lack of dollars led to lines at the Central Bank by people trying to exchange money. That situation has also worsened in recent weeks and the Bolivian government is having a hard time pushing back against the concerns being spread by people chatting online about the issue.
Banks and regulators should be proactively monitoring social media for potential rumors that could lead to panic and have strategies that communicate with the public as rapidly as possible. Latin American citizens have even less trust in their banking sectors than those in the US and Europe, meaning that banks that seem stable today could still face swift reactions from panicked customers if people begin doubting that their deposits are safe. With trust in political leaders also low in the region, people will also have doubts about whether their governments will actually help them in the event of an emergency. There are no signs of problems in most countries around the region right now, but one lesson from the past weeks is that events will move quite swiftly once they begin.