eToro decided to reduce the leverage on the new positions to prevent the impact of SVB's collapse.
eToro is one of the financial companies which reacted to the collapse of SVB. The broker cut the leverage down permitted on new trading positions in the banking sector to a maximum of X1. eToro announced this to its clients as they have to adapt to what is happening in the market nowadays.
In the middle of March 2023, the equity markets were shocked after news of the collapse of Silicon Valley Bank (SVB), headquartered in Santa Clara, California. Rising interest rates hit the value of bonds and MBS. It makes the value of SVB's assets suffer a significant decrease. Concerns about SVB's ability to return depositors' money (solvency) began to occur when on March 8, 2022, SVB sold its assets amounting to $21 billion, resulting in a loss of $1.8 billion. SVB incurred losses.
The contagion of SVB infected other US banks like Signature Bank and the crypto-friendly bank Silvergate bank. They are shutting down several days after SVB's fall. What happened in the US haunted the US bank shares. eToro feels that they have to act, and reducing the leverage should be done to prevent contagion. Still, the broker said the leverage restriction only affects future positions. The existing positions are still being maintained.
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In trading, leverage allowed a trader to get a much larger exposure to the market than the amount he deposited to open the trade. For instance, if you have $1,000 and are trading on a leverage of 1:100, you effectively control a position worth $100,000 in the market. Therefore, when a broker, in this case, eToro, decides to cut their leverage, it means the margin of trading should be larger.