The intervention by US authorities in Silicon Valley Bank triggered a wave of fear across world stock markets, with notable declines in indices and a shaken mood among investors. In the early stages, the scale of the problems was underestimated. The bank’s size and its role in the country’s financial system were significant, yet unlike the institutions that collapsed in past crises, SVB’s issues and the overall health of the banking sector appeared different. Spanish banks operate with different structures and balance sheets, making a direct repeat seem unlikely today. The overall outcome of the financial crisis remains unpredictable, though the scenario does not suggest immediate, broad contagion.
What is Silicon Valley Bank?
Silicon Valley Bank, founded in Santa Clara, California in 1983 by two former Bank of America executives, grew into the 16th largest commercial bank in the United States by the end of the previous year. It held about 209 billion dollars in assets and 175.4 billion in deposits, employed over 8,500 people, and operated across 17 offices in California and Massachusetts, with additional presences in the United Kingdom, Europe, Asia, and the Middle East. The bank focused on technology startups and venture capital firms backing innovative and health care companies. SVB stood out as a large commercial lender in the United States, often compared to investment firms seen in other markets.
Why did the bank fall?
The decline came as interest rates rose to about 4.5 to 4.75 percent. The Federal Reserve tightened policy to combat inflation, while bank managers faced challenges in forecasting risks. Customer deposits surged in the two years following the coronavirus outbreak, boosting earnings for tech firms. The bank invested much of these deposits in U.S. Treasury securities. When rates rise, the yields on public debt increase as well, but the market value of those bonds falls, leaving SVB with assets priced below their purchase value.
What was the trigger for its fall?
By year end, the market value drop of the public debt portfolio reached about 15 billion dollars, nearly wiping out the bank’s reported capital. Hidden losses were a concern because without selling the debt, those losses stayed on the books. Reports from outlets like Bloomberg indicated Moody’s warned of a possible downgrade due to these hidden losses. In response, SVB moved to sell a substantial portion of its debt portfolio, totaling around 21 billion dollars, even at a loss, to raise liquidity. The plan also called for strengthening solvency with an additional 2.25 billion dollars in capital.
Why did the plan fail?
SVB likely anticipated that its strategy would unsettle depositors and investors. Yet the prospect of a Moody’s downgrade amplified fear, prompting actions from clients backed by advisory firms. Some investors advised their portfolio companies to withdraw funds. The resulting panic proved larger than expected. Reports indicate that customers withdrew about 42 billion euros on a single day, creating a liquidity gap near one billion dollars. The bank’s stock suffered heavy losses, leading authorities to intervene to stabilize the situation.
Is the situation of banks in Spain similar?
Spanish banks operate in a very different environment. Their client base includes families, self-employed individuals, small and medium sized enterprises, and large companies across various sectors. The debt portfolios carried by Spanish banks are less exposed to market value risk and more tilted toward held to maturity assets. The deposit guarantees and regulatory protections are structured differently, with a broader and more automatic liquidity framework. In practice, banks maintain robust liquidity, reducing the odds of a forced sale to meet obligations.
Why did investors’ fear spread to other banks?
In the United States, deposits up to 250 thousand dollars are insured by the federal agency. However, SVB showed that a large share of its deposits were not insured, raising concerns about the broader impact on the local entrepreneurial ecosystem. The fear extended to other banks as markets anticipated potential declines in debt values as rates climbed. Officials also moved to address another bank, Signature Bank in New York, which held sizable exposure to the crypto sector. The wider climate remained unsettled as lenders faced liquidity and confidence challenges.
What did the authorities do to prevent contamination, and will it be enough?
Over the weekend, federal and central bank authorities announced measures to provide exceptional support and guarantee deposits below 250 thousand dollars. A one year liquidity facility was proposed in exchange for Treasury securities, designed to prevent forced asset sales and stabilize markets. The effectiveness of these measures remains to be fully tested, as the roots of banking instability often lie in liquidity dynamics and the trust of customers and investors.