Silicon Valley Bank’s collapse and the spreading of fear

Founded in 1983, Silicon Valley Bank was the 16th largest bank in the United States, and the bank of choice for tech startups and big-name venture capitalists. It took just a day and a half for it to fall apart. On March 10th, the FDIC (Federal Deposit Insurance Corporation) announced the SVB collapse and declared it insolvent after the loss of $42 billion in deposits and interest rate hikes by the Federal Reserve (Fed) that sent its Treasury portfolio tumbling. This was the second largest bank failure in US history after Washington Mutual’s 2008 bankruptcy.

The consequences of this collapse were closures of other banks, notably the Signature Bank that happened two days later, rattled global markets, and threatened the livelihoods of startups across the country. Almost half of the country’s venture capital-backed technology would rely on SVB. Some of their clients would easily be considered risky due to the speed at which their money flows.

After the 2008 financial crisis, which brought about the Great Recession, then-President Barack Obama signed the Wall Street reform known as the Dodd-Frank Act to promote tighter regulation of the US financial system and provided incentives to protect consumers and the national economic system. The reason for promoting this reform was to avoid the creation of new bubbles such as that of subprime mortgages. It introduced the Volcker Rule, which intended to protect bank customers by preventing banks from making certain types of speculative investments and avoiding commercial banks from using their customers’ deposits to trade on the financial markets for risky operations. Moreover, it added more tasks to the SEC (Securities and Exchange Commission) and CFTC (Commodity Futures Trading Commission) to better control the derivatives market, the cause of the latest financial crises.

However, during the Trump Administration, some of these regulations were abandoned. “By liberating small banks from excessive ‘bureaucracy’, and that’s what it was, bureaucracy, we are unleashing the economic potential of our people,” President Trump declared.

After the brief stock market crash in 2020, technology stocks were skyrocketing, and many US tech and biotech companies were capitalizing on this momentum by issuing new shares. Indeed, during the pandemic, companies deposited almost $200 billion in banks such as SVB, making 2021 its most profitable year ever. SVB decided to invest in Treasury bonds and other long-term debts.

As soon as SVB had collected billions of dollars from its bond investments, interest rates rose suddenly, and bond prices fell. The gap between bond market price and what SVB had paid for had jumped to more than $17 billion. SVB mistakenly went out to the market and said that they would raise capital right around the time when the crypto bank went under. Even though the crash of the SVBs and crypto banks are not connected due to bad information, especially on social media, people got scared.

On March 8, SVB announced the sale of $1.8 billion worth of securities to help cover its decline in deposits. Fear spread among investors, due also to the fact that SVB’s stock fell significantly. Many startups withdrew their deposits from the bank. The FDIC announced that customers would have full access to their insured deposits in three days. Professionals in the banking field attempted to spread confidence in the banking industry to avoid a bigger panic. SVB’s main client focus was Silicon Valley investors with flighty deposits, which came in contrast to sustaining long-term investments and bonds. Currently, President Joe Biden declared he was going to propose to Congress to strengthen the rules for banks.

Regarding Italy, on March 13th, the FTSE Italia Banche Index decreased by 4.2%. This drop was due to a possible lack of confidence in the banking industry. However, Italian banks tend to be more stable. Italy has a return on equity (ROE) higher than not only the European average but also the American average. Christian Carrese, Intermonte’s bank analyst, has declared that “Italian banks present solid liquidity ratios, a very resilient funding structure, and loans well below total deposits.” The two major challenges that the Federal Reserve (Fed) must face are the dilemma of inflation and financial instability and the need to keep a close eye on the possible infections of regional banks. Diodovich, the senior market strategist of IG Italia, believes that after the current process of restraint, the 50-basis point hike pre-announced by the Fed before the SVB collapse could be completely ruled out. In the same vein, we can consider the European Central Bank (ECB). Even though President Christine Lagarde announced that it was very likely to increase the interest rate by 50 basis points, she would probably back off from it.

Bibliography

1) Flitter, E., & Copeland, R. (2023, March 14). Silicon Valley Bank Fails After Run on Deposits. The New York Times. https://www.nytimes.com/2023/03/10/business/silicon valley-bank-stock.html

2) Fountain, N. (2023, March 16). Silicon Valley Bank’s collapse and rescue. NPR. https://www.npr.org/2023/03/13/1163155347/svb-silicon-valley-bank-collapse bailout-failure

3) FDIC Creates a Deposit Insurance National Bank of Santa Clara to Protect Insured Depositors of Silicon Valley Bank, Santa Clara, California.

https://www.fdic.gov/news/press-releases/2023/pr23016.html

4) Sreedhar, V. (2023, March 21). SVB collapse puts limelight on financial over macro stability; what will Fed do now? The Economic Times. https://economictimes.indiatimes.com/markets/stocks/news/svb-collapse-puts limelight-on-financial-over-macro-stability-what-will-fed-do now/articleshow/98853112.cms

5) Borsa Italiana. (n.d.). Dodd Frank Act – Borsa

Italiana. https://www.borsaitaliana.it/notizie/sotto-la-lente/dodd-frank-act-143.htm