Wake-up call from SVB case
We are now entering a dangerous zone!!!
I woke up on a Saturday morning and saw the beautilful sunshine with fresh air, then I enjoyed a cup of coffee and wondered what would I eat for breakfast today…
Later, meal had already been set up and I drew my attention to my daily news - Boom, “SVB“ term was everywhere on my social network Facebook, Twitter,… and everybody was freaking out. Sipped my coffee and dug into this phenomenal situation. Here we go!!!
The announcement
On March 8th, Silicon Valley Bank (SVB) announced that it had sold significant amounts of US Treasuries and agency mortgage-backed securities at a $1.8B loss and would be raising more than $2.25B in capital to strengthen its balance sheet. On March 9th, customers rushed to the bank and withdrew $42 Billion in deposits—more than 1/4 of the bank’s total.
On Friday, March 10th - FIDC informed in their latest Press Releases that the backbone of the Silicon Valley startup ecosystem, Sillicon Valley Bank (SVB) has been shut down
WASHINGTON – Silicon Valley Bank, Santa Clara, California, was closed today by the California Department of Financial Protection and Innovation, which appointed the Federal Deposit Insurance Corporation (FDIC) as receiver. To protect insured depositors, the FDIC created the Deposit Insurance National Bank of Santa Clara (DINB). At the time of closing, the FDIC as receiver immediately transferred to the DINB all insured deposits of Silicon Valley Bank.
Silicon Valley Bank is the first FDIC–insured institution to fail this year. The last FDIC–insured institution to close was Almena State Bank, Almena, Kansas, on October 23, 2020.
Silicon Valley Bank was not a small bank. It was the 16th largest in US financial system. Therefore, Its failure has been considered as one of the biggest collapse since the 2008 financial crisis.
The run of Sillicon Valley Bank
To know well about how the bank fall out, first we need to know about some fundamental informations of Bank Runs (which Noah Smith has presented clearly in his article)
Fundamentally, a bank is a company that borrows short and lends long. Checking accounts, for example, represent money that a bank borrows from depositors. The bank has to pay that money back to depositors whenever they want it — if you go to an ATM or a bank window and withdraw your money, you get it instantly. Banks don’t pay very high interest on checking accounts or their other short-term liabilities. Meanwhile, the bank invests in long-term assets — mortgages, for example, or corporate loans — that earn a high return, but can’t be quickly liquidated (or at least, not for full value).
The difference between the high return on their long-term assets and the low cost of their short-term liabilities is called the interest rate spread, and it’s the most important way that banks make their profits. But this is a risky business. Because the assets are illiquid long-term stuff, they can’t quickly be sold off for full value. So if all the people who lend money to the bank (e.g. depositors) come asking for their money back all at once, the bank simply won’t be able to pay them all off. This risk is called maturity mismatch. And when the lenders all ask for their money back at once, it’s called a bank run.
SVB had invested most of its money in long-term government securities that paid low interest rates.
Source: Apricitas Economics
Meanwhile, the Fed raised the rates, forcing SVB to offer higher interest rates to its clients to keep their cash. But startups were spending cash faster than before and SVB didn’t anticipate the need for more liquidity.
This triggered a bank run on SVB. A bank run happens when many people try to withdraw their money at the same time, fearing that the bank will collapse. The first ones to withdraw get their money back, but the rest lose everything. It’s a self-fulfilling prophecy — if enough people believe a bank is in trouble, they will cause it by rushing to get their money out
Normally, to prevent bank runs, the US, like most countries, offers guarantees, by way of the FDIC, to depositors who have deposits of less than $250,000.They will be made whole whatever happens and so have no incentive to run, whatever the state of the bank - Come by the term “FDIC Insured Deposit“. For a normal bank, about 50% of deposits are FDIC insured.
But 93% of SVB’s deposits were not FDIC insured. So SVB was vulnerable.
Source: Apricitas Economics
SVB mainly served tech and startup companies, which had unstable cash flows. Startups usually didn’t make much revenue in the early stages. They relied on selling equity to VCs to raise cash. They used that cash to pay their employees and other bills. While they waited to spend that cash, they needed a place to store it. Many of them chose SVB as their bank
What triggered the run?
First situation is a self-fulfilling prophecy
SVB’s stock plunged on Thursday when it sold many of its assets to raise cash. Soon after, VC firms told their startups to take their money out of SVB. The panic spread quickly.
The bank run began when Founders’ Fund, a VC firm led by Peter Thiel, advised its companies to withdraw from SVB. Startups tend to follow the advice of influential VCs. As Matt Levine wrote:
Also, I am sorry to be rude, but…nobody on Earth is more of a herd animal than Silicon Valley venture capitalists…if all of your depositors are startups with the same handful of venture capitalists on their boards, and all those venture capitalists are competing with each other to Add Value and Be Influencers and Do The Current Thing by calling all their portfolio companies to say “hey, did you hear, everyone’s taking money out of Silicon Valley Bank, you should too,” then all of your depositors will take their money out at the same time
Another scenario might happen with withdrawals due to a worsening VC investment situation.
Tech and startups in general has been suffering a lot from macro factors and policies. The rise in worrying that startup cash withdrawals would be the collapse in venture funding is continue increasing respectively and has result in some perspectives:
Many startups rely on venture capital (VC) funding to grow their businesses and innovate their products. However, when the tech market crashed, VC funding became scarce and hard to obtain. This forced many startups to use their “runway” - the amount of time they could operate with their existing cash before running out. As a result, many startups withdrew large sums of money from their bank accounts at Silicon Valley Bank (SVB), while few new deposits came in from successful VC rounds.
This put a lot of pressure on SVB, which had to sell its assets to meet the demand for cash from its customers. It started by selling its most liquid assets, such as stocks and bonds, but this left it with a pile of less liquid assets, such as loans and mortgages. This made SVB more vulnerable to a bank run - a situation where many depositors lose confidence in the bank and try to withdraw their money at once. Moreover, the asset sales might have signaled to some depositors that SVB was in trouble and insolvent, which triggered the actual run.
In short, SVB was a victim of the tech bust, and it failed in the same way that many banks have failed throughout history.
Main focus is not SVB but the effects
The sound of those hooks on newspappers is very aggressive and overreacting. In fact, it is not that kinds of seriousness and not likely to have the same scenario like 2008 crisis.
A lots of reputation banks are doing just fine, and there are some rumors from insiders that big banks are tending to work on buying SVB business. If it is true, there are nothing to suprise because big banks like Goldman Sachs or JP Morgan Chase, could just buy most or all of SVB’s assets and take over its deposit accounts. Then, finding a single buyer would make the sale happen quickly, which would reduce the chance of panic and contagion, this might be what the FDIC is trying to do now.
SVB may have been famous for making risky loans to startups, but its balance sheet was heavy on long-dated government and corporate bonds, which are very easy to value and which will have retained most of their value.So, there is nothing like the byzantine toxic housing assets involved in the 2008 crash.
The short-term effect of SVB is a decrease in a whole U.S banks sector and might be on international levels but I think it is just sentiment.
What make I consider is the consequences and effects of some macro factors such as interest rate, inflation,… because those are what will cause some more examples like SVB specifically and the whole economy generally
Fed Chairman J. Powell testified before Congress and said that interest rates would be “likely higher” than expected. The effect of interest rate have been connecting with these currently negative points and the nearest one was the fallen of SVB and Signature Bank. And the market of course, did not prefer that perspective.
The market expects the Fed to raise the Fed Funds Rate by 50 basis points in the next FOMC meeting. This could have interesting implications for the economy.t!
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