What Happened With SVB?
Silicon Valley Bank (SVB) has gone bankrupt.
SVB is a relatively small US bank. Its stock market value is about 15,000 million euros.
However, its bankruptcy has caused the market to remember the fear of the financial crisis of 2008.
Why Fear Of Financial Crisis?
Traditional Bank Business
A traditional bank receives money from its customers and then uses that money to make loans to other customers.
Beyond loans to own customers, what the traditional bank cannot lend to own clients, it lends to other banks or invests in bonds.
But this represents a relatively smaller percentage.
Special Bank Business
SVB was a special bank.
It was specialized doing business with start-ups of technology.
The start-ups companies get a lot of money at once in financing rounds with investors, and they have to deposit that money in a financial institution until they need it.
SVB Financial Growth
SVB went from having 44,000 million dollars in deposits in 2017, to having 173,000 million at the end of 2022.
What Was SVB Doing With Money?
A part was lent, like all banks, especially to private equity or venture capital funds.
However, most of the money from the deposits was invested in bonds, which accounted for almost 60% of its total balance, about 4 times more than in a traditional bank.
Interest Rates Hikes
The rapid rise in interest rates in the last year has caused the value of bonds to fall, because the new bonds (with higher interest rates) are worth more than the old ones.
Although the bonds are worth less, that "loss" is not a problem as long as they do not have to be sold, because it is recovered over time.
Money Out Of The Bank
But SVB had to sell.
With rising rates, tech companies have had to face higher expenses, and have taken a lot of money out of the bank.
Other companies withdrew their money just in case, even if they didn't need it.
Loss Of 1,800 Million Euros
SVB had to sell part of its bonds in order to repay its depositors.
And that generated real losses of about 1,800 million euros.
Those losses don't break the bank, but they weaken it.
So they decide to increase capital by about 2,500 million dollars, to improve their strength.
SVB Clients Afraid of Money Loss
However, upon revealing the amount of the losses, clients became afraid and began to withdraw money en masse.
The fact that its clients are a small group of interconnected companies accelerated the panic.
Silvergate Bank Cryptocurrencies
Also, in parallel, there was (in an unrelated way) the bankruptcy of a small bank specializing in cryptocurrencies, Silvergate, which failed to recover from the shock of the FTX collapse a few months ago.
American Regulator
Faced with panic, the American regulator opted to intervene the bank on Friday, stopping its activity.
Signature Bank
Another bank that was focused on cryptocurrencies due to the systemic risk it entailed, Signature Bank, has also intervened.
Why It is Important?
It is due to the possibility of contagion.
In the 2008 crisis, the lack of bank credit was the biggest trigger for the collapse in economic activity.
No bank was sure of the solvency of the rest of the banks, so they chose not to risk lending to anyone.
Now doubts arise about the soundness of the banks.
What Is Going To Happen?
At the moment the bank has been intervened and depositors are going to get their money back.
Investors and bondholders are unlikely to get anything back.
Federal Reserve's View On Interest Rates
In addition, the risk that banks stop lending to each other due to mistrust could lead to a slowdown in the economy, and that may alter the Federal Reserve's view on interest rates.
US & European Market
The market has reacted: expected gains in the US are delayed or softened.
Europe will also have to be vigilant.
This puts fixed income up (because tomorrow's bonds don't have to be worth more than today's).
Rest Of The World Market
The contagion to the rest of the world should be limited, since the crisis is caused by the specific business model of this bank, and this model does not exist in Europe.
European banks have between 15 and 20% of their assets in bonds, while SVB had 56%.
No Global Banking Crisis
There are not enough elements to provoke a global banking crisis.
However, it is natural that for a while there would be doubts about the soundness of the banking sector and the effects of rapid rate hikes on their balance sheets.
But the central banks have announced that they are willing to help banks in need.
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