Saturday, April 1, 2023

The keys to the collapse of Silicon Valley Bank

The sudden fall of Silicon Valley Bank (SVB), one of the biggest banking collapses in US history, has raised doubts about the health of the sector and fears of a new financial crisis.

These are the keys to the SVB case, the authorities’ response and the implications for the financial system:

A bank with particularities

The SVB, founded in 1983 in the Californian town of Santa Clara, is not an entity to use. Almost from its inception, the firm became a darling of the burgeoning US tech sector, specializing in serving start-ups and the venture capital firms that finance them.

Like all of Silicon Valley, the SVB multiplied its business during the pandemic, and its assets tripled between the end of 2019 and mid-2022 thanks to all the money that technology companies -buoyant at that time- deposited in their accounts.

At the time of its collapse, it was the 16th-largest commercial bank in the US, with some $175 billion in deposits, but with one important particularity: serving mainly companies and executives in the technology sector, about 97% of those deposits exceeded US$250,000 covered by the US guarantee fund.

The origin of the problems

Numerous factors influenced the collapse of the SVB, but its origin was above all a bet on the part of the entity that was affected by the rapid rise in interest rates undertaken by the Federal Reserve (FED) to contain inflation.

The bank, like many of its competitors, has invested billions of dollars in long-term bonds in recent years, taking advantage of low money prices. That bet, usually considered a very safe thing, was complicated by the rise in rates, which caused the price of these public debt products to fall.

Compared to other entities that were in a position to wait for the bonds to mature, last week the SVB had to sell a significant number of them at a loss in order to obtain liquidity with which to meet the withdrawals of money from its clients, mostly tech companies that had seen their revenues plummet or start-ups that had been cut off from funding and now had to pull the cash they had amassed.

panic and collapse

Instead of helping to balance their books, the SVB’s move spooked markets and clients, who rushed to withdraw their money, especially after several big venture capital firms, including the one run by influential tycoon Peter Thiel , they will recommend to their companies to withdraw their funds from the bank.

With a poorly diversified and highly interconnected client base, the bank suffered a dizzying bank run that on Friday forced regulators to step in and close the bank to limit the damage.

The panic spread to other firms and by Sunday it had also swept away New York-based Signature Bank, which in recent years had made a significant commitment to the cryptocurrency sector.

The response of the authorities

After seizing control of the SVB on Friday and unsuccessfully seeking to sell it to another bank, US regulators on Sunday opted to guarantee all deposits held by both banks, beyond the standard limit of $250,000 per client, in order to contain panic and allow affected businesses to continue operating.

In addition, they announced an emergency program to offer liquidity to other banks with large amounts invested in bonds and avoid having to dispose of them at a loss, as happened to the SVB.

Rescue or no rescue?

The intervention of the authorities has generated a strong debate in the United States about whether or not this constitutes a new bank bailout, as occurred in the 2008 crisis.

The White House has so far insisted that the money to be used to guarantee deposits will come from a guarantee fund to which US banks contribute and will not be financed with taxpayer money.

In addition, US President Joe Biden made it clear that the managers responsible for this crisis will lose their jobs and that investors in these entities “will not be protected.”

“They knowingly took a risk and when the risk fails investors lose their money. This is how capitalism works,” Biden stressed this Monday.

However, many analysts and some politicians insist that, although different from 2008, this is once again a bailout of banks that had made the wrong decisions.

Contagion is limited for now

For now, Washington’s measures appear to be working to prevent large-scale contagion to the rest of the banking sector, which has experienced a few days of strong nervousness.

The SVB’s collapse sent bank shares tumbling virtually worldwide and several regional US banks plunged in value, triggering fears that they could eventually collapse as well.

Entities such as the First Republic, Western Alliance or PacWest, among others, collapsed in recent days on Wall Street, but this Tuesday they managed to rebound and recover a good part of what was lost as the markets seemed to shake off their fear.

Prelude to another crisis?

The fall of the SVB has brought to mind many names such as Bear Stearns and Lehman Brothers, whose collapse triggered the 2008 financial crisis and the Great Recession that marked the global economy for years to come.

“This is not 2008,” White House spokeswoman Karine Jean-Pierre repeated insistently on Monday, trying to reassure citizens and markets.

Although many analysts agree that there is little chance that the current situation will lead to a new large-scale financial crisis, the SVB case has added more nervousness to an already complex situation, marked by persistent inflation and fear of a possible recession as a consequence of the increases in interest rates.

Now much of the focus is shifting back to the Federal Reserve and other central banks, which must nitpick to keep trying to contain rising prices while preventing their actions from creating new problems.


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