Silicon Valley Bank: The four days that shook the U.S. banking system

Silicon Valley Bank: The four days that shook the U.S. banking system

The U.S. banking system has been shaken by an earthquake that no one could have anticipated. An earthquake that left three banks collapsed and forced the authorities to take radical measures to reassure customers.

It all started Wednesday night after the announcement of the liquidation of. Silvergate Banka small regional bank that had become a favorite destination for the cryptocurrency community.

The La Jolla, California-based entity, which suffered a series of setbacks in the cryptouniverse, particularly with the debacle of platform FTXThe company had to face a wave of withdrawals that left it unable to meet its commitments.

That same night, another much larger bank, the Silicon Valley Bank (SVB)announced that it was also undergoing massive withdrawals.

A favorite of much of the emerging technology sector, the SVB suffered from the slowdown of the new economy.

Investment funds are increasingly turning to banks for fundraising difficulties, and as far as startups are concerned, they have a chronic need for cash flow to finance their growth.

The SVB is also under pressure, like the rest of the banks, from the Federal Reserve’s (Fed, central bank) strong monetary tightening.

Most of the money banks borrow is short term in order to be able to lend long term.

In general, they benefit from short-term rates being significantly lower than long-term rates. However, the Fed’s monetary tightening caused the opposite phenomenon and reduced banks’ margins.

In a thoughtful presentation, the SVB highlighted on Wednesday the soundness of its accounts and the relatively low ratio of its loans compared to deposits.

However, in addition to the drop in its deposits, it announced that it launched a $2.25 billion capital increase.

It also revealed that it sold an emergency portfolio of $21 billion in financial securities to secure its cash reserves, an operation in which it lost $1.8 billion.

Race against the clock

The announcement was enough to alert investors and clients, who rushed to recover their assets the next day. Thursday only, SVB received withdrawal orders for about $42 billion.

Even without having been able to fulfill all the requests, by Thursday night it was already showing a negative cash flow of almost $1 billion, a sign that it transferred more cash than it had available.

SVB was also punished on the stock market, where its share fell by 60 % during the session.

On Friday, trading in its stock was suspended, and immediately afterwards the Federal Deposit Insurance Corporation (FDIC) announced that it was taking control of the agonizing entity, unable to find a buyer.

The major local banks remained relatively unscathed, but several medium-sized or regional institutions began to feel the effects.

Signature Bank of New York, PacWest of California or Western Alliance, based in Phoenix (Arizona), lost more than 20% on the day.

Many were concerned about the fate of the deposits in the SVBof which only 4% of the total $170 billion are covered by the FDIC guarantee mechanism, which guarantees up to $250,000 per customer per bank.

The technology sector fears a hecatomb due to not being able to access the funds deposited in SVB, but beyond this case, the fear extends to individuals and companies in other sectors.

On Sunday, the Fed, the Treasury Department and the FDIC said they will act to ensure that all customers can withdraw all of their money from the SVB.

They also announced that. Signature Bankthe country’s 21st largest bank in terms of business size, was intervened and that its customers will benefit from the same system as those of the SVB.

The Fed offered to lend to other institutions that may need it to meet withdrawals.

After a race against the clock, US authorities hoped to have restored confidence in their banking system before markets reopened on Monday.(AFP)

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Daniel Chapman