Text/Dorothy Neufeld, Financial Writer; Translated/Jinjin Finance xiaozou
On March 13, the U.S. Treasury, the Federal Reserve, and the FDIC jointly announced that Silicon Valley Bank depositors will have access to all of their funds beginning Monday, March 13. At the same time, the Federal Reserve expressed its readiness to respond to any liquidity pressure that may arise. This marks a temporary resolution to the run on Silicon Valley banks. Let’s look back at the timeline of the bank’s run and closure.
Just a few days ago, Silicon Valley Bank (SVB) was still considered a revered player in the tech space, with thousands of U.S. venture capital-backed startups among its clients.
But fast forward to last weekend, and SVB was shut down by regulators after a panic-induced bank run.
So, what the hell is going on here? We will delve into this below.
The road to a bank run
SVB and its clients generally thrived in an era of low interest rates, but as rates rose, SVB found itself more exposed than the average bank. Even so, at the end of 2022, the bank’s balance sheet shows no reason to panic.
Moreover, the bank has received a wide range of positive reviews in many areas. Most Wall Street analysts have an overwhelmingly positive rating on the bank’s stock, and Forbes just named the bank to its Financial All-Star list.
External signs of trouble emerged on Wednesday, March 8, when SVB announced it needed to raise more than $2 billion to shore up its balance sheet.
Prominent VCs reacted less positively, with Coatue Management, Union Square Ventures and Peter Thiel’s Founders Fund all moving to limit exposure to the 40-year-old bank. The influence of these companies certainly added fuel to the fire, and a bank run ensued.
Also influencing the decision is the fact that SVB has the highest proportion of uninsured domestic deposits of any large bank. These deposits total nearly $152 billion, or about 97% of all deposits.
By the end of the day, customers had attempted to withdraw $42 billion in deposits.
What triggers the crash of SVB?
While SVB’s collapse took place in just 44 hours, its roots can be traced back to the early days of the COVID-19 pandemic.
In 2021, U.S. venture capital-backed companies raised a record $330 billion, twice as much as in 2020. At the time, interest rates were at rock-bottom levels to help shore up the economy.
Matt Levine summed up the situation well: “When interest rates are low everywhere, a dollar in 20 years is about the same as a dollar today, so if a startup’s business model is ‘we do artificial intelligence Construction will lose money for 10 years and then make a fortune in the far future”, that sounds pretty good. When interest rates are high, a dollar today is worth more than a dollar tomorrow, so investors want cash flow. When interest rates are low for a long period of time and then suddenly go higher, all the money going to customers is cut off abruptly.”
Why is this important? During that time, SVB has received billions of dollars in funding from these VC-backed clients. In just one year, their deposits have grown by 100%. They invest these funds in long-term bonds. The result was a dangerous trap, as the company expected rates to stay low.
During this period, SVB invested in market-leading bonds. As interest rates rose and bond prices fell, SVB’s long-term bond holdings began to suffer big losses.
Losses exacerbate liquidity crisis
When SVB reports its fourth-quarter results for the previous year in early 2023, credit ratings agency Moody’s Investor Service is paying special attention. In early March, the rating agency said that SVB was at high risk of a downgrade due to significant unrealized losses.
In response, SVB hopes to sell $2 billion of investments at a loss to help add liquidity to its struggling balance sheet. Soon, more hedge funds and venture capitalists realized that SVB might be walking on eggshells. Depositors rushed to withdraw their funds, triggering a liquidity crunch that prompted California regulators and the Federal Deposit Insurance Corporation (FDIC) to step in and shut down the bank.
How is the situation now?
While much of SVB’s activity has been centered in the tech sector, its shocking collapse has unnerved an already jittery financial sector.
The day before SVB collapsed, the four largest U.S. banks lost a combined $52 billion. Other bank stocks posted double-digit losses on Friday, including Signature Bank (-23%), First Republic (-15%) and Silvergate Capital (-11%).
After the dust settles, it’s hard to predict what kind of knock-on effects this drama will have. For investors, Treasury Secretary Janet Yellen declared she was very confident the banking system remained resilient, noting that regulators had the tools in place to deal with the problem.
But others believe that problems were brewing as early as 2020 (or earlier), when commercial bank assets soared and banks bought bonds at lower rates.
The entire industry is in crisis, and the banks and investors backing these assets have to figure out what to do with them. — Christopher Whalen, Institutional Risk Analyst