The Collapse of SVB: Everything You Need To Know -without the noise
There has been a lot of noise about the collapse of Silicon Valley Bank (SVB)- what happened, how it was caused and what effect it will have.
Norm has made this article & TL;DR for you so you have the facts, without the surrounding noise and bogus opinions.
The TL;DR is at the top of this blog- and the full article is below.
- Silicon Valley Bank (SVB) reported a $US1.8 billion ($2.7 billion) loss on its sale of US Treasury securities, prompting investors to pull their money out of the bank, leading regulators to shut it down on March 12th.
- This was the largest bank failure since the 2008 global financial crisis, with approximately $US200 billion in assets, and 65,000 startups receiving venture capital funding being customers of SVB
- In response, Treasury Secretary Janet Yellen, Federal Reserve Board Chair Jerome Powell, and Federal Deposit Insurance Corporation Chairman Martin Gruenberg have taken decisive actions to safeguard depositors and protect the US economy.
- The collapse of Silicon Valley Bank followed the failure of two other banks: Silvergate Capital and Signature Bank.
- In the wake of SVB's collapse, analysts are worried that it could trigger a US recession, which could in turn worsen the current economic situation and increase the possibility of a worldwide recession.
- The cause of SVB's collapse was due to the bank's investment in US Treasury bonds, which saw its value decrease as the US Federal Reserve raised rates, leading to substantial losses for the bank.
- Regulators have taken swift action to protect depositors and prevent the spread of the crisis, including protecting all depositors (not just those with smaller balances covered by standard FDIC protections).
- The failure of SVB puts more pressure on tech startups and suggests there could be further instability within the banking sector.
- As a result of the SVB collapse, analysts warn that the Federal Reserve and Reserve Bank may be unwilling to increase rates whenever inflation and retail sales figures suggest it.
The Collapse of SVB: Everything You Need To Know -without the noise
In the wake of news that Silicon Valley Bank (SVB) was in dire straits, American investors, who still have vivid memories of the global financial crisis, experienced a natural sense of panic. According to journalist Eric Newcomer's online post, a group of about a dozen tech founders with cash with SVB reportedly went to SVB's Manhattan location on Park Avenue. Newcomer, who writes a newsletter on "the inner workings of the startup industry", revealed that one of the founders who showed up at the bank branch was former Lyft executive Dor Levi, a fact Levi confirmed in a LinkedIn post he made three days ago. In his post, he noted that "SVB was our 'safe' bank with the largest allocation compared to our other accounts."
However, as news of SVB's dire situation unfolded, investors became nervous. On March 8, Silicon Valley Bank (SVB) reported a $US1.8 billion ($2.7 billion) loss on its sale of US Treasury securities. Levi stated that he became "more concerned by text messages, emails, and notes about VCs telling their Portcos (portfolio companies) to move funds out." By the time Levi and the other investors decided to pull their money from the bank, the "SVB site was down, my account was blocked, and bankers were unreachable." It took "about 16 hours for SVB support to unblock my account," and he also "went to the NY branch as it opened to try and get a cashier's check."
Levi mentioned that US building managers at SVB's Manhattan branch "called the cops" on him and the other investors who had shown up to get their money. A photo taken by Levi and posted on Newcomer's site shows the New York Police Department's vehicle outside the bank.
In a stunning turn of events, California regulators shut down Silicon Valley Bank on Friday morning, sending the bank's shares plummeting by 66 percent just before the announcement. With approximately $US200 billion in assets, the Santa Clara-based bank was the 16th largest in the US, making it the largest bank failure since the 2008 global financial crisis. Of the roughly 65,000 startups that receive venture capital funding in the US, half are SVB customers, and as depositors began withdrawing their funds, prominent venture capital firms recommended that their portfolio companies follow suit.
The regulators' response to the bank's collapse was swift, in contrast to the criticism levied against regulators during the 2008 financial crisis for moving too slowly. Treasury Secretary Janet Yellen, Federal Reserve Board Chair Jerome Powell, and Federal Deposit Insurance Corporation Chairman Martin Gruenberg announced decisive actions to safeguard depositors and protect the US economy. However, concerns remain that the demise of Silicon Valley Bank could have far-reaching ripple effects throughout the world.
The bank's collapse follows the shutdowns of two other banks: Silvergate Capital and Signature Bank. Silvergate Capital, a central lender to the cryptocurrency industry, recently announced that it would be winding down operations and liquidating its bank, while Signature Bank, which had a strong crypto focus but was much larger than Silvergate, was seized by banking regulators on Sunday. These developments have alarmed investors and caused many to speculate about the fragility of the banking sector and the potential for further instability.
US-based Wedbush Securities' managing director, Daniel Ives, has stated that the collapse of Silicon Valley Bank (SVB) will have a significant impact on the tech startup scene. He adds that SVB was vital for the financing of tech startups and that its disappearance could make it difficult for startups to receive funding. Consequently, Ives fears that some startups could fail, while others may be forced to merge. Additionally, Betashares chief economist David Bassanese is apprehensive that the collapse of SVB could trigger a US recession. In turn, this could worsen the world’s current economic situation and increase the possibility of a world-wide recession.
The SVB collapse unfolded during the pandemic when the bank and many other banks were taking on more deposits than they could lend out to borrowers. In 2021, deposits at SVB doubled, and the bank invested whatever they could not lend out into safe US Treasury securities. However, as the US Federal Reserve raised rates, the value of these securities decreased, leading to a significant loss for the bank. Ives described the entire event as "a debacle" and criticized the bank for not being adequately prepared. He believes that in the coming years, the incident will be studied to determine how it occurred. Ultimately, SVB's assets were lower than their liabilities, forcing them to raise significant capital, and a bank run began.
Following the collapse of Silicon Valley Bank (SVB), regulators have taken swift action to protect depositors and prevent the spread of the crisis. In addition to the measures taken to rescue SVB, regulators have also intervened to safeguard deposits held with New York-based Signature Bank. At the end of last year, Signature Bank had $US110.36 billion ($165.5 billion) in assets and $US88.59 billion ($132.85) in deposits, according to New York state's Department of Financial Services.
The joint statement released by the US Treasury Department and other bank regulators confirmed that both Silicon Valley Bank and Signature Bank will be made whole, and that "no losses will be borne by the taxpayer". The Federal Deposit Insurance Corporation (FDIC) usually protects deposits of up to $US250,000, but in the case of SVB, the FDIC has confirmed that it will backstop all depositors, not just those with smaller balances covered by standard FDIC protections.
While the intervention of regulators has been widely applauded, some commentators fear that the collapse of Silicon Valley Bank and the protections put in place to rescue depositors could have broader implications. In particular, some investors may be spooked by the fact that "shareholders and certain unsecured debt holders will not be protected", as confirmed by the FDIC. This could lead to a sell-off of shares in companies with exposures to the banks in the coming weeks.
The collapse of Silicon Valley Bank (SVB), alongside the failures of Signature Bank and Silvergate Capital, have raised concerns about the vulnerability of certain parts of the financial system. Social media users have noted that before serving as the chief administrative officer (CAO) at SVB, Joseph Gentile was the chief financial officer (CFO) at Lehman Brothers' Global Investment Bank before its public collapse in 2008, leading some to wonder if this is "Lehman 2.0". This has sparked a debate on platforms like Twitter.
The collapse of Lehman Brothers in 2008 was the fourth-largest investment bank in the US and marked the final trigger for the global financial crisis. Rabobank's global strategist Michael Every notes that SVB, now being carved up, found itself in a peculiar position of having been brought down by having too much money and was forced to liquidate long-duration assets at steep losses. Every also asks why the bank's balance sheet was not hedged against this interest rate risk. He says deposits in SVB were largely made by tech startups, wealthy Californians, and Democratic Party donors, including Harry and Meghan and Oprah.
Every notes that reputations are at stake here, especially as the SVB board was composed of heavy hitters, including Gentile. He fears that blaming Gentile for the financial crisis is a new variant on an old theme that we are likely to hear more of, saying, "Because 'You get a bailout! And you get a bailout! And you! And you!' is now being heard by everyone involved." It appears the failures of Signature Bank, Silvergate Capital, and SVB demonstrate how vulnerable certain parts of the financial system are.
In contrast to the global financial crisis, the recent collapse of Silicon Valley Bank (SVB) does not pose a systemic risk to the banking system because the world's largest banks are "extremely well capitalized" post the GFC, according to Dan Ives, managing director of equity research at Wedbush Securities. However, he notes that these banks were the "foundation of the tech startup landscape," and that regulators needed to ensure that the SVB collapse did not cause a bank run among regional banks. To prevent the spread of the issue, regulators acted quickly to "extinguish the fire."
Going forward, Ives predicts that lenders will be more "stringent" in funding startups at their doorstep, potentially leading to failures, mergers, or alternative financing routes such as private equity firms. This will put even more pressure on tech startups and cause ripple effects around the world, as the industry is interconnected. As Ives notes, "It ripples to Australia, to Asia, to Europe to the rest of the world, because it all starts in Silicon Valley. It's a spider web that's tied together."
Betashares chief economist David Bassanese has warned that the recent collapse of Silicon Valley Bank (SVB) could trigger a recession in the United States. In his view, such an outcome would compel the Federal Reserve and Reserve Bank to halt their ongoing rate hikes. Bassanese has also questioned how many other smaller banks could be sitting on major paper losses, leaving them vulnerable to a non-insured depositor run. Despite depositors being protected, he warns that investors may still panic, which could lead to more bank failures. "It's hard to believe there's not a few more SVBs out there somewhere – especially now many more analysts will be looking for them," he cautions. "You may get many of these banks going under, or being unable to lend...These banks are sitting on a lot of unrealised losses on their bond portfolio. And maybe technically, if they had to sell those bonds at market value, they could become insolvent." In his view, this is how contagion can spread. He notes that regulators have protected depositors, but not shareholders, which he believes to be the problem.
Betashares chief economist David Bassanese has warned that the collapse of Silicon Valley Bank (SVB) could cause a recession in the US, which could lead to a significant fall in confidence, potentially causing credit conditions to freeze and businesses' access to credit to be impeded. Bassanese further suggests that even if the banks are not at risk of insolvency, depositors may still panic and withdraw their funds. This, in turn, could result in a "hard landing" for the US economy, which would then flow through to other OECD countries. He adds that a recession is technically defined as two quarters of negative economic growth, but an increase in the unemployment rate of at least 1.5 per cent could still lead to significant problems.
"The world has already got problems like high inflation, raising rates, slowing growth … and the last thing we want is a US recession," says Bassanese. Shane Oliver, AMP Capital's head of investment strategy, echoes the sentiment, noting that the market is still nervous, and the implications of these bank collapses will take time to play out. He adds that if the SVB collapse turns out to be a storm in a teacup and it's over in a week, the Federal Reserve will return to looking at data and contemplating a 25 or 50 basis point increase in rates. However, if there are still reverberations, it would be hard to do a 50 basis point hike even if inflation and retail sales figures justify it.
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