from being a solvent start-up bank… to the first major victim of rising interest rates in the world
For years, only good news has come from Silicon Valley. It is there that the future is designed, which is now the present. In the realm of technologywhich lives five to ten years ahead of the rest of the world, nothing can go wrong.
But Silicon Valley companies, like all companies, need funding, lots of it. And if the success of such and such a technology is unpredictable, so is the money. That is why Silicon Valley Bank (SVB), which was solvent and safe until two days ago, is now history. The U.S. financial regulator and the markets have decided against it because of its lack of liquidity and insolvency.
A bank for startups
SVB was born as a bank in 1983 and had specialized in serving startups technology startups. It was headquartered in California’s Santa Clara and had 17 branches in the states of California and Massachusetts. It was the 16th largest bank in the U.S. and the largest by deposits in Silicon Valley
Just a week ago it was worth $10 billion on the stock market.
At the close of 2022, the bank had assets worth about $209 billion and about $175.4 billion in deposits. Just a week ago it was worth $10 billion on the stock market.
The bank falls, not its customers
The bank announced on Wednesday that it was going to seek a Capital increase to try to address its difficulties. financial difficulties, which had led it to dispose of some $21 billion worth of investments, at a loss of some $1.8 billion. But it did not get there in time.
And so, the U.S. Federal Reserve (Fed) has decided to let it fall, but. bailing out customers. The U.S. FDIC, somewhat similar to our Deposit Guarantee Fund, will guarantee all bank customer deposits and beyond even the legal limit of $250,000. On the other hand, the bank is buried. Shareholders and the majority of bondholders who had some kind of instrument with SVB as issuer will regret it.
Homicide or suicide
SVB served nearly half of the U.S. venture-backed technology and healthcare companies that went public last year. Most of its clients were, in addition to start-ups, high net worth individuals and private equity funds.
After a sharp rise in long-term rates it is normal. What is not normal is in case #SVB: a bond portfolio of almost half the balance sheet, financed with short deposits and a beastly duration gap between assets and liabilities. Latent losses were eating up capital.
– Ignacio Ezquiaga (@IgnacioEzquiaga) March 12, 2023
“The ‘postmortem’ examination of the entity points to signs of a violent death, with some of its large clients as suspects.but also of suicide and negligence in managing the bank’s liquidity and risk. Some people still don’t believe it because it was one of the most solvent banks, with the best reputation and the best clients in the US”, writes Ruben J. Lapetra in La Información.
The wound of the rate hike
The source of its problems lay in the interest rate hikes that the Fed, like all other central banks in most parts of the world, had pushed through in an attempt to lower inflation. The company came under pressure as the rate hikes made it difficult for its customers to raise funds. by raising private funds or selling shares.
HSBC has taken over SVB’s UK subsidiary for £1.
More and more customers were withdrawing deposits, in a trend that worsened last week. The bank collapsed on Friday as it was unable to collect sufficient money to cover losses from asset sales. These were mainly U.S. government bonds, which were hit by rising rates.
Avoiding the domino effect
Banking stocks around the world fell on Thursday in response to the SVB crisis. Twenty-four hours later, hedge fund manager Bill Ackman likened the situation to the last days of Bear Stearns.the first bank to collapse at the beginning of the global financial crisis of 2007-2008 (Lehman Brothers would come later).
The risk of failure and deposit losses here is that the next, least well-capitalized bank faces a run and fails and the dominoes continue to fall. That is why gov’t intervention should be considered.
– Bill Ackman (@BillAckman) March 10, 2023
“The risk of failure and deposit losses here is that the next least capitalized bank runs and fails and the dominoes keep falling“, Ackman wrote in a series of tweets. That’s what Joe Biden’s economic team has been trying to avoid since Friday.
The echo in the ‘city’ London
And UK, because SVB had a branch in that country. Rishi Sunak’s government is working on a lifeline for British technology companies affected by the bankruptcy. HSBC has taken over SVB’s UK subsidiary for £1.. In principle, the rescue deal is at no cost to the taxpayer and with deposits protected.
The Chinese SVB joint venture, whose chairman is the president of Shanghai Pudong Development Bank, claims that its operations remain “sound.” SVB’s failure was the largest (by assets) of any bank since the 2007-2008 financial crisis.