On March 10, a statement issued by the Federal Deposit Insurance Corporation of the United States led the Silicon Valley Bank of the United States to go bankrupt at a light speed. This has also become the largest failure of the US financial industry since 2008.
Some people called the Silicon Valley Bank incident “a mass extinction event for start-up companies”, while others said that it was the first time in their lives that they experienced 12 hours of a well-known bank from thunderstorm to run to bankruptcy.
Nearly half of the venture capital-backed technology and life science start-ups in the United States have established financing relationships with Silicon Valley Bank, so why did Silicon Valley Bank explode overnight? How will it be performed in the future? The incident is still in progress. This article summarizes the market progress and comprehensive media reports within 48 hours.
01 Bankruptcy for 48 hours!Unable to pay wages, layoffs or current
Silicon Valley Bank is the home of many start-ups and VCs. The lightspeed bankruptcy has also caused many venture capital companies and technology companies in the center of Silicon Valley to experience the darkest moment in history. It is understood that more than 1,000 YC companies all The payroll is in Silicon Valley Bank, not to mention a large number of VC funds and listed technology companies.
The Financial Associated Press reported that in an interview with the media, Chen Jiaxing, president of the well-known startup incubator Y Combinator, called the Silicon Valley Bank incident “a mass extinction event for startups.” It will take months to get the money, and it will destroy an entire generation of startups in the United States by then.
According to China Business News, An Di (pseudonym), an entrepreneur of a Chinese medical start-up company, said, “We have been trying to transfer money out since yesterday (March 10), but before the transfer, the bank closed down first. Everything happened so fast.” Currently, the status of the bank’s website shows that it is under maintenance.
Some people also said in the circle of friends that for the first time in their lives, they experienced 12 hours of a well-known bank from a thunderstorm to a run to bankruptcy, and quickly completed the asset transfer. Silicon Valley Bank went bankrupt in a short time.
And this series of capital chain breaks that will also be triggered may make it impossible to pay wages and layoffs, which are happening one after another in Silicon Valley technology companies.
Greg Martin, founding partner of the investment company Liquid Stock, said: More than 50% of technology companies store most of their cash in Silicon Valley banks. The worst case scenario is that thousands of Silicon Valley “workers” will not be paid next week. Since it is illegal to hire employees without paying wages, large-scale layoffs are inevitable.
The panic caused by the collapse of Silicon Valley Bank is also spreading in Silicon Valley. A large number of employees of Silicon Valley technology companies complained that this will be the “darkest day” in Silicon Valley.
02 Will Silicon Valley Bank be “Lehman Second”?
Why is Silicon Valley Bank thundering? Simply put, this is a liquidity crisis caused by rising interest rates. Silicon Valley Bank chose to sell assets at a discount in order to meet the needs of customers to withdraw funds, but this behavior also caused the market to question the bank’s solvency, which eventually intensified the run and triggered market volatility.
The Federal Reserve once implemented loose policies, allowing the funds of many technology startups to flow into commercial banks such as Silicon Valley Bank that focus on serving entrepreneurship. With the surge in deposits, Silicon Valley Bank purchased a large number of U.S. bonds and mortgage-backed bonds.
After the United States entered the cycle of interest rate hikes, the asset prices held by Silicon Valley Bank dropped significantly. At the same time, due to changes in the financing environment, start-up companies began to consume deposits continuously. The emotional contagion of the system.
At the same time, in terms of business model, Silicon Valley Bank is also different from ordinary commercial banks. It will issue loans in exchange for customers’ equity or options. For customers who are particularly optimistic, they will also participate in investment through the bank’s VC department to obtain capital appreciation and so on.
Active guidance, long-term service – we work with the most innovative founders, CEOs and investors to help them survive and thrive in the ever-changing innovation economy. We support companies at all stages of growth and serve investors at all stages, tracks and regions.
The above-mentioned company vision embodies the unique value of Silicon Valley Bank, and it is basically the only large commercial bank in the world with such a positioning.
Will the thunderstorm at Silicon Valley Bank trigger a systemic crisis like in 2008?
First of all, the business model of Silicon Valley Bank has certain particularities. Its customer base is mainly scientific and technological innovation enterprises, which are too sensitive to liquidity and technology cycles.
According to Chuangyebang, Xu Min, a professor of finance at Zhejiang University of Finance and Economics, believes that Silicon Valley Bank is different from Lehman Brothers, and there is a big difference between the two.
“Lehman Brothers is an investment bank, while Silicon Valley Bank is a commercial bank. Moreover, before the 2008 financial crisis, Lehman Brothers was the fourth largest investment bank in the United States, and its leverage was high through asset securitization; plus its A large number of products were sold to other financial institutions around the world, so the explosion triggered a chain reaction, and the depth and breadth of the impact was unmatched by the explosion of Silicon Valley Bank.” Xu Min said.
As a commercial bank, Silicon Valley Bank’s business is mainly deposit and bond investment. Xu Min said that the characteristics of Bank of America are different from our domestic banks. At first, they were not allowed to set up branches across states. This has resulted in a particularly large number of banks in the United States. There are still more than 7,000 of them, and the vast majority of commercial banks are relatively small. Branches across state boundaries were not allowed until the 1980s when a corresponding act was passed. Even big banks such as JP Morgan and Bank of America have branches in more than a dozen states in the United States, mostly relying on overseas business.
Of course, when Silicon Valley Bank lends to high-tech start-ups, it will also use its own capital to buy a small part of the equity (or stock options) of these companies, and it also plays the role of an investment bank to a certain extent.
Of course, Xu Min believes that the biggest risk brought about by the bankruptcy of Silicon Valley Bank lies in the panic effect brought about by this incident. “Panic sentiment is contagious. If the panic sentiment is transmitted, and then banks fail one after another, the risk will be incalculable.”
At the same time, two days after the Silicon Valley crisis, the FDIC came forward to take over. From the perspective of panic, it also curbed it to a certain extent.
03 The pressure is on the Fed
Silicon Valley Bank’s business is concentrated in fields such as technology and venture capital, and it relies less on deposits from individual depositors than traditional banks. The Federal Reserve’s aggressive interest rate hikes have led to a drop in bond prices, rapid loss of deposits in commercial banks, and increased financing costs. In this context, Silicon Valley Bank was not prepared, leading to the current predicament.
But Silicon Valley Bank is not alone in this predicament.
Therefore, the collapse of Silicon Valley Bank at the speed of light has also triggered the market’s thinking about the Fed’s next interest rate hike.
On March 11, Xinhua News Agency reported that analysts said that the closure of Silicon Valley Bank highlighted the negative impact of the US Federal Reserve’s aggressive interest rate hikes. The Federal Reserve’s aggressive interest rate hikes have led to a drop in bond prices, rapid loss of deposits in commercial banks, and increased financing costs. In this context, Silicon Valley Bank was not prepared, leading to the current predicament.
Markets were still swinging between a 25 and 50 basis point rate hike ahead of Friday’s event. It also means that after a strong rate hike of 450 basis points in the past year, there is at least 50 or 75 basis points of upside to follow.
Wall Street Journal reporter Nick Timiraos, known as the “New Federal Reserve News Agency”, pointed out in his latest article that the turmoil caused by the collapse of the Silicon Valley bank has greatly dispelled the market’s expectations for a 50 basis point interest rate hike.
The Societe Generale macro team believes that with the signs of economic fragility such as the rising unemployment rate gradually emerging, and the profit impact faced by enterprises represented by technology companies is gradually emerging, superimposed on the liquidity incident of Silicon Valley Bank, the Fed returns to the policy of raising interest rates by 50bp The possibility is low, because the lagging effect of monetary policy on the cooling demand side is the core logic of the Federal Reserve’s slowdown in raising interest rates in February; however, the stickiness of core service inflation has not yet been resolved, especially the employment growth and The hourly wages show that the resilience may last longer than thought, and continue to support “stay higher for longer”.