With the collapse of the Silicon Valley Bank the “Lehman Brothers” specter returns. The collapse of SVB, a Californian credit institution specialized in financing start-ups and which at the end of 2022 had approximately 209 billion dollars in total assets and approximately 175,4 billion in total deposits, is a flash collapse. But that for a series of chain events has resulted in one deposit escape it's a collapse of confidence by investors such as to lead it to bankruptcy.
Since the implosion of the US financial system in 2008, Wall Street fears a new “Lehman moment,” a trigger event named after the ill-fated investment bank and which led to the wider collapse of the banking system and economy. But it must be said that SVB was a very particular bank as it collected the liquidity of Silicon Valley start-ups and the venture capital funds that financed them.
Why did Silicon Valley Bank fail?
All the analyzes circulating in these hours agree: Svb has adopted a risky financial strategy and is now paying the consequences.
During the most acute phase of the Covid-19 pandemic, tech companies had obtained a lot of liquidity from investors - venture capital funds - and therefore parked it in the current accounts of the Californian bank.
Since SVP's customers were full of dollars looking for investments (and certainly didn't need loans), the demand for credit was low, and so the bank began investing deposits in securities that guaranteed a good return. Meaning what long-term obligations who pay coupons and higher rates precisely because they are riskier. However, the value of US Treasury securities decreased significantly during 2022, as a result of the rise in interest rates which on the one hand dried up the collection of new liquidity and on the other inflicted losses on the bond portfolio on the banks' assets.
A hand of poker gone bad
The Fed's rate hike to fight inflation has increased the yields payable to depositors on their checking accounts, as businesses demand market-consistent rates to keep their money parked. When market rates rise, bond prices adjust downwards. This weighed on tech startups – Silicon Valley Bank's main clients – because it made their investors more risk-averse and cash-hunting. Also because the tech sector has entered a season of cuts and major rethinking of investments.
The race for deposits
To finance the redemptions, Silicon Valley Bank sold a $8 billion bond portfolio on Wednesday, March 21, composed mostly of US Treasuries. The portfolio averaged 1,79%, well below the current 10-year Treasury yield of approximately 3,9%. This forced SVB to post a loss of $1,8 billion, which it attempted to make up for with a capital increase. The next day the value of his title it dropped by 60%. A decision that took operators and customers by surprise: the bank was in desperate need of liquidity, because otherwise it would not have sold T-bonds at a loss for an equivalent value equal to a tenth of the balance sheet assets. At that point the race for withdrawals was unleashed. And the (failed) attempt to raise the same amount on the market by selling shares forced the Fdic to intervene and freeze everything. The Fdci added that it will seek to sell SVB's assets and that future payments from dividends could be made to uninsured depositors.
SVB's crash on the stock market infects banks around the world
The collapse of the Svb share also dragged with it, in a domino effect, the shares of the four largest American banks, Jp Morgan Chase, Bank of America, Citigroup e Wells Fargo that have burned billions of dollars of valorisation. And the contagion has also spread to Europe and Asia.
In recent years, the number of failed banks has decreased, thanks in part to the stricter regulations introduced following the financial crisis. Before Silicon Valley Bank, the latest firm to fail was in late 2020, when the pandemic was ravaging the country.
SVB bankruptcy: contagion feared
It's unclear whether the Silicon Valley Bank collapse will spill over into the entire industry. The bank was best known for its loans to tech and healthcare start-ups, and had $209 billion in assets at the end of last year, making it the 16th largest bank of the nation. But that's still small compared to the top three, which hold more than $XNUMX trillion each and have far more diverse business models and customer bases.
The legislation introduced for the country's largest banks after the financial crisis has strict capital requirements, which means that they must have a certain amount of reserves for times of crisis, as well as stipulating how diversified their activities must be.
Furthermore, Silicon Valley Bank and other banks of its size do not have the same regulatory oversight. In 2018, President Donald J. Trump signed into law a law that eased checks for many regional banks. SVB's chief executive, Greg Becker, has been a strong supporter of the law. Among other things, the law changed the requirements for the amount of liquidity these banks must keep on their balance sheets to protect themselves from shocks.
What is the difference with Lehman Brothers?
Here's the difference: The sunk mortgage debt of Lehman, which caused its insolvency, was on all the big banks' balance sheets, hence the need for a government bailout to avoid financial Armageddon.
While Silicon Valley Bank primarily served venture capital firms that started withdrawing money from accounts as tech losses mounted. Big banks like JPMorgan have a more diverse customer base; therefore, they don't have to worry about dumping Treasuries to meet a bank run, at least not yet. But the danger grows for banks that have many bonds in their stomachs, such as Pacific West, Western Alliance e FirstRepublic which suffered heavy losses on the stock market yesterday.
But that doesn't mean that SVB's experience isn't worrying.
It is quite clear that the end of the era of low rates will leave some scars, built over years of "gift money" from central banks and tax write-downs by the Biden administration who have distorted the plumbing of the banking system to such an extent that recent interest rate hikes are starting to wreak havoc: depressing bonds held not just by the SVB, but by all the major banks.
