On March 10, the Federal Deposit Insurance Corporation (FDIC) issued a statement that the California Department of Financial Protection and Innovation (DFPI) had announced the closure of Silicon Valley Bank (SVB) with the FDIC appointed as the receiver. This means that SVB, with nearly USD 210 billion in assets and ranked 16th largest in the U.S., has collapsed and become the biggest bank failure in the country since the 2008 financial crisis. According to experts, on March 10 alone, USD 42 billion in deposits fled from SVB, while the company's latest quarterly report showed total deposits of approximately USD 173 billion. It is apparent that the SVB has experienced significant run-on deposits. According to the takeover order submitted by the DFPI, SVB's cash balance was -USD 958 million as of March 9.
Since its establishment nearly 40 years ago, SVB has become the financial core of the U.S. technology industry, especially for start-ups and venture capitalists investing in related companies. SVB is known for providing banking services to early-stage startups that have difficulty obtaining the same services elsewhere before generating stable cash flow. Therefore, SVB has been favored by technology companies. Just two years ago, SVB faced the opposite problem - too much money. According to Bloomberg, SVB's deposit volume doubled to USD 124 billion in the 12 months before March 2021, far exceeding JPMorgan's 24% growth during the same period.
Why has SVB, favored by the technology industry, now fallen into the plight of bankruptcy?
There are several reasons why SVB failed. First, its customer base was too concentrated, with mainly Silicon Valley tech companies, and about 30% of all tech startups were SVB's clients. Since most startups are not profitable and rely heavily on financing, when many of them ran out of funding in 2022 due to tighter monetary conditions, they were forced to rely on their deposits to sustain their operations, according to an analysis of Professor Hu Jie of the Shanghai Advanced Institute of Finance at Shanghai Jiao Tong University. This resulted in a decline in SVB's deposits, while its own assets were locked in long-term bonds, causing increasingly severe cash flow problems this year. On March 8, SVB announced that it needed to raise USD 2.25 billion to support its balance sheet, and it had already sold all available bonds at a loss of USD 1.8 billion, which surprised investors. The panic caused by SVB's selling bonds and other financing actions at a loss triggered a vicious cycle of more depositors withdrawing their money, leading to the collapse of the bank.
The second reason for SVB's collapse is due to the investment losses caused by the rising interest rates in the U.S. In the past, with low-interest rates, many tech startups could easily secure a large amount of financing, and SVB used the growing deposits of these tech companies as collateral to purchase a large number of mortgage-backed securities (MBS) and long-term government bonds (i.e., low-yield bonds). However, with the arrival of a rising interest rate environment in the U.S., the bonds SVB invested in have decreased in value. By the end of 2022, the market value of SVB's held-to-maturity securities had lost more than USD 15 billion. It's worth noting that, like SVB, many American banks have invested in a large number of financial products such as bonds using growing deposits as collateral, and as a result, they will face similar risks as interest rates rise and deposits decrease.
Ironically, according to CNBC, just hours before the regulatory authorities seized the bank on March 10, SVB employees received their annual bonuses for 2022, ranging from around USD 12,000 for associates to USD 140,000 for managing directors. On March 11, the Fortune website reported that 11 days before SVB declared bankruptcy, its CEO Greg Becker sold USD 3.6 million worth of shares in SVB Financial Group, the bank's parent company. Becker had submitted the relevant plan to sell the shares as early as January 26. Since January 20, SVB's Chief Marketing Officer Michelle Draper had also begun selling shares, up to 28% of her total shares. Daniel Beck, the company's CFO, also sold 32% of his shares.
It should be pointed out that SVB is a state-chartered commercial bank headquartered in Santa Clara, California. It is a member of the Federal Reserve System and has 17 branches in California and Massachusetts. After news of SVB's collapse broke out, the U.S. financial regulatory authorities reacted quickly. On March 10, Treasury Secretary Janet Yellen convened officials from the Federal Reserve, the FDIC, and the Office of the Comptroller of the Currency (OCC) to discuss the incident and expressed confidence in dealing with such situations. On the same day, the FDIC announced the establishment of a new entity that took over SVB. After SVB was seized, the FDIC provided 45 days of employment opportunities to SVB employees. On the same day, Cecilia Rouse, the chair of the White House Council of Economic Advisers, stated that the U.S. banking system is fundamentally different from that of the 2008 financial crisis, "our banking system is in — is in a fundamentally different place than it was, you know, a decade ago, and that the reforms that were put into place back then really provide the kind of resilience that we'd like to see". The U.S. financial regulatory authorities' rapid joint action has played a certain role in stabilizing market confidence.
The collapse of SVB is a highly concerning issue in the market as many are wondering about its impact and whether it will trigger another financial crisis.
Currently, the financial industry and academia seem to be optimistic about the SVB collapse, with their reasons mainly being: (1) the collapse of SVB will mainly impact the technology investment sector, and some start-up and technology companies will be greatly affected, causing some damage to Silicon Valley's financial ecology. However, it is a controllable local event on the boundary, and the risk will not spread to other banks. Some market participants believe that SVB is a medium-sized bank with assets of USD 200 billion, which is significantly different from Lehman Brothers in 2008. Before the collapse, Lehman Brothers' assets were USD 639 billion, with businesses covering over 40 countries globally and ranking as the fourth-largest investment bank in the U.S. at the time. Therefore, the intensity of the risk it may trigger is relatively low. (2) U.S. Treasury, Federal Reserve, FDIC, and other institutions have taken action, and the FDIC will provide insurance coverage of up to USD 250,000 for each depositor. With the regulatory authorities' fast action and experience gained from the financial crisis, they will not allow this incident to develop into systemic financial risk. (3) Some institutions believe that there is no problem with SVB's investment operations on the asset side, as purchasing MBS and long-term government bonds are common investments for US financial institutions. SVB's primary risk lies in its liabilities, namely the withdrawal needs of its depositors. If it can obtain some funding support, SVB will have a chance to weather the storm.
However, the affected technology companies are not as optimistic. Due to SVB's deep business connections with many technology companies, its bankruptcy will cause significant losses to these companies. Many start-ups will not even be able to pay their employees due to this. SVB's UK subsidiary will declare bankruptcy and stop trading, causing panic among UK start-ups. On March 10th, about 180 technology company executives wrote to the UK Chancellor of the Exchequer, Jeremy Hunt, requesting government intervention, stating that "the loss of deposits has the potential to cripple the sector and set the ecosystem back 20 years… Many businesses will be sent into involuntary liquidation overnight". Industry insiders also warn that the UK is just the beginning, as SVB has branches in countries such as Canada, Denmark, Germany, India, Israel, and Sweden. Without government intervention, the collapse of SVB may wipe out start-ups globally.
Analysts have also noted that the plight of SVB is not an isolated case. The Fed's decision to raise interest rates has resulted in declines in the value of securities assets held by many U.S. banks, and more banks may face similar situations in the future. For instance, like SVB, First Republic Bank's liability side also heavily depends on deposits from depositors, primarily affluent individual clients. As per financial reports, as of the end of 2022, First Republic Bank had a total of USD 176.4 billion in deposits, which accounted for approximately 90% of its total liabilities. Of these deposits, 35% were non-interest bearing, and 68% had no insurance coverage. With the interest rate hikes, depositors now have more investment options to earn interest, and uninsured deposits are more prone to runs in a market with rumors of instability. Some investors are concerned that as the Fed continues to raise interest rates to tackle inflation, the impact of asset devaluation caused by the rising interest rates may cause difficulties for other banks. They believe that the collapse of SVB is just the tip of the iceberg, and many smaller banks are currently facing difficulties as well.
As it stands, the aftermath of the collapse of SVB is still unfolding. The degree of the spread of the risk depends on the intervention and rescue measures of regulatory agencies such as the FDIC, as well as the market's expectations and acceptance of SVB's bankruptcy restructuring. Researchers at ANBOUND believe that the impact of this event will have serious consequences on the technology and finance ecosystem in the U.S. and will affect certain technology companies and financing markets, including China's sci-tech innovation board.
We also believe that the problem with SVB is not just a liquidity issue for a single bank, but rather a widespread problem. Against the backdrop of the Fed's interest rate hikes, tech companies are facing significant valuation pressures and need cash. This has led to liquidity problems at SVB, a bank that serves technology companies and VC funds. On the one hand, a shortage of funds for its lending clients has increased credit asset risk. On the other hand, tech companies in the bank's deposit base also need funds. This has put pressure on the bank from both its liabilities and assets.
SVB's collapse can be seen as the first domino to fall under the backdrop of the Fed's interest rate hikes. Unless regulatory authorities in the U.S. intervene and provide effective assistance, the valuations of technology companies will continue to decrease, and VC funds will keep squeezing banks for cash and selling off shares of startups, leading to liquidity pressure on the capital market. Furthermore, if this situation continues to spread, other sectors will also face increasing pressure in a high-interest-rate environment. If market panic spreads further to the real estate market, most commercial banks will be directly affected. Therefore, the sudden collapse of Silvergate, a U.S. cryptocurrency bank, combined with the unexpected collapse of SVB, could potentially trigger an irreversible market panic during an extended market downturn, causing liquidity problems to escalate into even greater risks.
Final analysis conclusion:
The collapse of SVB is creating a ripple effect in the international financial market, which is directly impacting the tech industry and venture capital sector in the U.S. and other countries. It is worth noting that the collapse of SVB, together with that of Silvergate, is linked to the Fed's sustained interest rate hikes amid high inflation pressure. The impact of the rising U.S. dollar interest rates on the market environment is universal, hence there is a need to keep a close eye on the recurrence of similar risk events in other banks and be cautious of the risks spreading to commercial banks and the real estate market.