What happened to the "Silicon Valley Bank bankruptcy" that shocked the world? Will it trigger a crisis?

The biggest news in the financial circle these days is probably the bankruptcy of Silicon Valley Bank (SVB) .

I believe that after many rounds of information bombardment, you are already familiar with many data about Silicon Valley Bank, such as the 16th largest bank in the United States, the second largest bankrupt bank in U.S. history, etc.

So today we will not go into details, but mainly explain how this rising star of the banking industry went bankrupt.

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Silicon Valley Bank was founded in 1982, and as of June 2020, its deposits were approximately US$76 billion.

At that time, COVID-19 was spreading most rampantly in the United States, and the US government chose to "lie down, print money, and give money" to fight the epidemic. This move was a godsend for American technology companies, because the epidemic seriously changed people's work and lifestyles. A large number of work-from-home opportunities created more demand for technology, and the huge amount of US dollars printed by the US government was just looking for a good direction to invest. As a result, venture capitalists continuously got money from banks and continuously invested in many startups in Silicon Valley. And these startups got the money and continuously deposited it into Silicon Valley Bank...

So a year and a half later, at the end of 2021, Silicon Valley Bank's deposits reached a staggering $190 billion. At that time, the entire United States was in a state of crazy stimulus, so the Federal Reserve maintained a near-zero interest rate for a long time. For Silicon Valley Bank, with so many deposits at almost zero cost, of course it had to find a stable and reliable investment channel.

After searching for a long time, Silicon Valley Bank made a decision: they decided to use more than 100 billion US dollars to purchase US long-term Treasury bonds and MBS (Mortgage-Backed Security). The yields of these two bonds are not too high, about 1.5% to 2%, but they are stable and safe and easy to resell.

If the US economic trend remained unchanged, there would be little risk in doing so, but the Federal Reserve raised interest rates.

After the most recent rate hike, the Fed's interest rate reached 4.5%~4.75%, while just a year ago, this number was close to 0. The interest rate hike has caused the world to begin to lack dollars, including the prosperous technology venture capital, their purse began to tighten, and Silicon Valley's technology companies certainly did not have a steady stream of US dollars to come in. To continue research and development and operations, they can only use the money in their bank accounts. So they began to withdraw money from Silicon Valley Bank. In 2022, the total deposits of Silicon Valley Bank decreased by about 16 billion, especially the current interest-free deposits, which decreased from 126 billion to 81 billion, which greatly increased the bank's interest expense pressure.

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Another straw that broke the camel's back came in November last year when the cryptocurrency exchange FTX, a major client of Silicon Valley Bank, suddenly collapsed, triggering strict scrutiny from U.S. regulators . Some of Silicon Valley Bank's clients withdrew their company funds from Silicon Valley Bank because they were worried that strict scrutiny would affect the safety of their own funds. The combination of these two factors led to a liquidity crisis for Silicon Valley Bank.

At this time, Greg Becker, CEO of Silicon Valley Bank, made a decision. He decided to sell part of the long-term bonds he held to ease the bank's liquidity crisis. Of course, since the bonds purchased before were mainly ten-year bonds, selling them in advance would definitely cause some losses. Specifically, he planned to sell about $21 billion in bonds, with a loss of about $1.8 billion. After the self-rescue plan was announced, the market responded with two plunges of more than 60%. In less than 48 hours, Silicon Valley Bank declared bankruptcy .

What's more frightening is that the problems associated with Silicon Valley Bank may be much bigger than itself. On March 12, Signature Bank, which is about half the size of Silicon Valley Bank, declared bankruptcy. It is the third largest bank to go bankrupt in US history. The US Treasury Department could not sit still. After a meeting, they urgently announced that all depositors' funds could be withdrawn in full, and the Federal Deposit Insurance Corporation (FDIC) would back them up. In fact, it is conceivable that if each depositor could only withdraw $250,000 according to the previous plan, then depositors across the United States would find ways to spread their deposits to various banks, strive to keep the deposits in each bank below $250,000, and give priority to large banks. In this way, small and medium-sized banks in the United States will encounter a greater run on the bank and the risk of bankruptcy will be greater.

Analysts believe that the Federal Reserve was frightened by the rapid bankruptcy of Silicon Valley Bank and may postpone or even stop raising interest rates.

However, will there be no problem if interest rate hikes are stopped? In the past few years, the money supply has been so high that inflation cannot be reduced without interest rate hikes. If interest rate hikes are carried out, banks and companies with weak risk resistance will not be able to hold on. The US government seems to be sitting on a "volcano". This time, the quick response has covered the "crater", but where will the next "crater" be? When will it erupt? Who knows?

Author: Stephen GPT

Review | Pan Helin Researcher, Zhejiang University International Business School

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