Silicon Valley Bank (SVB) is a bank founded in Santa Clara (California) in 1983 by two Bank of America executives who, according to some sources, had the idea to create the asset during a poker game. At the end of last year it was the 16th largest commercial bank in the United States. $209 billion in assets and $175.4 billion in deposits, more than 8,500 employees and 17 offices in California and Massachusetts, In addition to having a presence in the UK, Europe, Asia and the Middle East. Organization specializing in technological start-ups and venture capital firms committed to investing in innovative and healthcare companies. The first commercial bank to intervene in the United States since the small Almena State Bank of Kansas in October 2020, and the second largest bank in its history after Washington Mutual in 2008 (Lehman Brothers was actually an investment again in 2008) bank is more like a securities company in Spain).
Why did the bank fall?
its fall, sharp increase in official rates (at 4.5-4.75%), the Federal Reserve is battling the inflationary spiral in the US, but the main reason is bank managers’ lack of foresight. Thus, customers’ deposits at the bank more than doubled in the two years after the coronavirus pandemic, which sharply increased revenues for tech companies. The business used the acquired resources to purchase public debt from the US Treasury, which accounts for more than half of its assets. The problem is that when rates rise, the interest on public debt rises, but its price falls, so the bank has assets that have lost much of their value compared to the price they paid.
What was the trigger for his fall?
Thus, the value of the public debt portfolio had fallen by $15,000 million at the end of last year; these were enormous losses equivalent to his actual capital (16,200 million). However, it was about hidden obstaclesSo unless you have to sell the debt, you don’t put up with those red numbers, and in fact, if you could hold it until maturity, you wouldn’t draw it at all. According to some media outlets such as ‘Bloomberg’, the problem was the credit rating agency’s report two weeks ago. moody’s warned the bank that it could downgrade its debt due to these hidden losses. To try to avoid this, the bank decided to get rid of a significant portion (21,000 million) of its debt portfolio, even at a loss (1,800 million). gaining liquidity. Likewise, it announced that it would increase its capital of 2,250 million TL in order to strengthen its solvency and undertake the said losses.
Why did your plan fail?
The bank was probably aware that its plan would frighten depositors and investors, but it also knew that downgrading Moody’s would also frighten them, so it sought to move forward with a strategy he devised with his advisor. Goldman Sachs. In any case, the agency downgraded Wednesday. Some of its clients, such as the Fouders Fund, have been advising companies they have invested in for days to withdraw money from the SVB. But the panic that caused the operation was greater than he had anticipated. Clients tried to withdraw €42 billion on Thursday, one of the largest deposit outflows in history, leaving the bank with a negative cash liquidity position of nearly $1 billion. Its shares fell more than 60% in the stock market and the authorities had no choice but to intervene.
Why did investors’ fear spread to other banks?
Deposits of up to $250,000 are guaranteed in the United States, so if a bank goes bankrupt, Federal Deposit Guarantee Fund It pays attention to the customers to make refunds up to this amount. In the SVB example, 93% of deposits were not guaranteed and this would in principle have a strong impact on the California entrepreneurial ecosystem, causing huge losses for its clients. But on top of that, investors’ biggest fear is that other banks’ debt portfolios could fall as a result of the rise in interest rates. In fact, U.S. officials intervened over the weekend in another bank, New York Signature ($110,360 million in assets and 88,590 million deposits), in this case, a few days after a similar one had a lot of exposure to the crypto-asset business. Silvergate announced its intention to liquidate its bank on Wednesday.
What did the authorities do to prevent contamination, and will it be enough?
Also over the weekend, the U.S. government and central bank announced that they would give the two bankrupt banks exceptional treatment and guarantee all deposits below $250,000 (yes, shareholders and wholesale creditors will lose their money). through the program ‘Bank Term Financing Program’Banks will be able to obtain one-year liquidity from the Central Bank in exchange for Treasury bonds, which will not be subject to interest rate cuts as usual. The latter is key because that way they won’t have to write down the losses. They have tried to stop the transmission with this, but it is not yet clear whether this will be enough. For this reason, banks often go down because of liquidity leaks (deposit), not solvency issues, and trust is the key factor in this.