The SVB, the first weak link in the American banking system?

Tags : Etats-Unis, Silicon Valley Bank, bankrutcy, financial world, crisis,

Despite the intervention of the American authorities, the bankruptcy of the Bank of Silicon Valley continues to worry the banking and financial world, fearing – wrongly? – a risk of contagion.

In the United States, the Bank of Silicon Valley (SVB) was not considered a “systemically important” institution – understand: whose failure is likely to seriously harm the financial system and the real economy. And yet, its fall, recorded last Friday, continues to worry the banking and financial world, despite the decision of the American authorities to guarantee all customer deposits, beyond the official ceiling of 250,000 dollars. Even on this side of the Atlantic, the actions of the major banking groups lost their feathers again on Monday.

Could the SVB be the first weak link in the American banking system? Or, on the contrary, a particularly vulnerable institution – in which case the risk of contagion would be low, as American President Joe Biden himself assures? We will avoid drawing plans on the comet, to favor the decryption of the first two acts of the biggest bank failure in the United States since 2008.

Until last week, few people had heard of the SVB – outside of the small world of US start-ups and venture capital funds, which formed the bulk of its clientele. However, the institution did not spawn with small fry, since this institution, founded in 1983, had become the sixteenth commercial bank in the United States.

Its bankruptcy, recorded last Friday by the regulatory authorities, is not the consequence, as often, of the discovery of “corpses in the closet” – understand: “bad credits”, credits suddenly become defaulting which would have weighed down the bank’s assets.

If fate, this time, took the form of the blades of a pair of scissors, which in a few days closed on the institution, we can date the « original fault » in 2021. So, thanks to the craze investors, technological and medical start-ups have raised record amounts, intended to finance their development by allowing them to incur sometimes heavy losses for several years – they “burn cash”, it is said.

This cash, the start-ups have deposited in their bank account, in particular (but not only) with the SVB. Which was literally flooded: customer deposits almost doubled, from 102 to 189 billion dollars. The bank has chosen to place most of these funds in US Treasury bonds – a safe bet – despite their low remuneration, around 1.5% over ten years.

But now, since March of last year, the Federal Reserve, the central bank of the United States, has raised its key rates at a forced march, causing a rapid rise in short and long-term interest rates which are proved to be fatal for SVB.

Its clientele is specific, being made up of start-ups which, it has been said, “burn cash” every month – which implies that they gradually reduce their deposits – and are also more sensitive to the interest rates offered. by the banks, relative to the average saver who tolerates that the remuneration of his money placed in the bank only follows the rise in market rates with a delay.

However, to cope with the withdrawals which have increased in recent months, the SVB found itself obliged to sell part of its portfolio of State bonds, but with significant losses. Logic: with long-term interest rates fluctuating between 3.50% and 4% (at ten years) since last autumn, an investor will not buy a security issued in the past offering a significantly lower yield than s he gets a discount, a discount.

And this is how the SVB had to reveal, last Wednesday, a loss of 1.8 billion dollars, while announcing the issue of shares to strengthen its capital, up to 2.25 billion. But this attempt at recapitalization did not last long.

And for good reason: on Thursday, many customers massively emptied their accounts: in a few hours, a quarter of deposits, or 42 billion dollars, were transferred to other banks – a modern version of the bank panic, which the Anglo- Saxons name bank run , a more telling expression in that it evokes the rush of depositors at the bank’s counters.

The fate of the SVB was sealed. Friday morning, the authorities took control. End of the first act.

2. Act two: avoid the “rushes”

Throughout the weekend, the Federal Reserve, the US Treasury and the Depositor Protection Fund brainstormed to write the script for act two – read: crafting a response to ward off the potential consequences of bankruptcy. of the SVB, on the one hand, on the small world of start-ups and, on the other hand, on the American banking system.

Deposits in the United States are guaranteed by the State up to a maximum of 250,000 dollars (against 100,000 euros here). While this is a sufficient ceiling for most households, it is actually too low for businesses. This was particularly the case for SVB customers, 95% of whose deposits were not covered by the public guarantee or exceeded the threshold of 250,000 dollars.

The US authorities who had first announced that they would compensate depositors only up to this threshold, changed their tune over the weekend. Sunday evening, the three institutions thus specified that the depositors of the SVB would have access to all the amounts in account as of this Monday. For what ? Very simple. To prevent many start-ups, unable to pay their bills, their employees, etc., from being forced into bankruptcy themselves.

This intervention also aims to reassure the customers of other banks, in particular regional ones, while the authorities also decided on Sunday to take control of Signature Bank, a New York establishment closely linked to the cryptocurrency sector.

In the same spirit, the Federal Reserve announced, also on Sunday, that it was opening a new window, the Bank Term Funding Programme, in favor of banking institutions that would face large withdrawals. They will thus be able to obtain funds from the central bank, for one year, by pledging securities, essentially government bonds or bonds guaranteed by the public authorities, at their face value, and not at their market value. And thus would not be obliged, if necessary, to « liquidate » these assets at a discount.

Objective: to ward off the risk of a “bank run” on other institutions. And for good reason: a banking panic can turn out to be “self-fulfilling” and force a solvent bank to put the key under the doormat.

The scenario of a takeover of the activities of the SVB by another banking institution or a consortium of banks had been mentioned; but on this front, no white smoke for the moment. This is, on the other hand, the path followed across the Channel, where HSBC took over, for a symbolic pound, the English branch of the SVB, after a long weekend of negotiations, the announcement having been made on Monday before the opening of European markets.

3. Act three: the script is not written

The fire, however, did not seem contained on Monday. In Europe, the stock markets remained on a downward trend, with banking securities, in particular, once again losing feathers – between 5 and 6% for KBC, ING or BNP Paribas – despite reassuring statements from the authorities, in particular the National Bank and the Commissioner European Economy, Paolo Gentiloni, who ruled out the risk of contagion on the Old Continent. Across the Atlantic, bank stocks also opened in the red, as the shares of several regional banks – in particular, First Republic, PacWest and East West – tumbled on Wall Street.

Obviously, the markets do not seem (yet?) convinced by the interventions of the authorities announced this weekend and the reassuring words of the Secretary of the Treasury, Janet Yellen, and the head of the Federal Reserve, Jerome Powell, to which joins this Monday President Biden himself who, in a short intervention swore to his fellow citizens: “Your deposit will be there when you need it. The script for act three will be written over the next few days.

SVB bankruptcy: the financial agony of tech in Silicon Valley

Chronicle of an announced collapse: the troubles of the Silicon Valley Bank were linked to the rise in interest rates and the fall in investments in start-ups. The whole sector was aware of this. This did not prevent a historic crash, the sectoral consequences of which promise to be lasting.

The origins of evil are known. So apprehended, moreover, and singled out, that the fall of the SVB house (Silicon Valley Bank) hardly surprised. Except perhaps for its suddenness, and the enormity of the potential consequences for the entire tech sector.

The euphoria of Silicon Valley, for a long and beautiful decade, drained investors and the creation of start-ups, guaranteed by phenomenal liquidity and constantly renewed promises of innovation, from cryptocurrency to artificial intelligence, passing through the biosciences and their exciting medical applications. The covid crisis had led the Federal Reserve to offer zero rates for borrowing and interest, increasing the audacity of investors tenfold.

But the overheating of the economy, the geopolitical crises, the specter of a new great recession, led the Fed to whistle the end of the recess and to raise significantly, durably, its interest rates. The end of easy money, borrowed at low rates, has led investors to act more parsimoniously, forcing start-ups to dip into their cash reserves, thereby emptying the coffers of the SVB. Unable to manage these massive withdrawals and raise additional funds (in a suddenly gloomy context, with massive layoffs in 2022), SVB then received the final blow, from large VCs (venture capitalists) such as Peter Thiel, with his Founders Fund, urging their clients to withdraw all their assets from the weakened institution.

A single director with experience

The famous snowball effect, dreaded by all but amplified by growing anxiety and initiated discreetly in December, before experiencing a swerve last week: in a few hours, withdrawal requests amounted to 42 billion dollars, out of a total of 175 billion on deposit at the bank, whose headquarters are in Santa Clara. Total irresponsibility, protests Mark Suster, of Upfront Ventures, in Los Angeles: « You are at the cinema and you shout fire when it is not the case, then you congratulate yourself for having been the first to say to everyone to go out, while the others hunkered down. You sleep well ? »

« I would like to congratulate my peer investors, whose remarkable recommendations in all respects in recent hours have caused a desperate flight of capital from SVB », added Brad Svrluga, of Primary, on LinkedIn on Friday. “A real disaster in terms of leadership”. Especially since the SVB was not cut out to withstand earthquakes. In Northern California, “the SVB had no equivalent, recalls Ben Bergman, tech specialist at Business Insider. No other bank was able to lend money to so many start-up founders, who tended to be young and without great financial guarantees. It also offered a very wide range of products: debt management, venture capital, bridging loans, loans to business creators”. Created around a game of poker in 1983, the bank identified so much with its ecosystem that it hid its structural flaws: “How is it that it only had one director with real experience in corporate banking? added Bergman on Twitter. The board of directors was essentially made up of consultants, start-up bosses and investors”.

The general bailout promised by the Biden Administration does not reassure any tech player. “There is an urgent need to find a way to restrict these incredible and limitless flows of capital, warns Bryan Merchant, tech specialist at the Los Angeles Times . Or at least to tax them proportionally, to be sure to bring the sector back to its feet on Earth”. The episode has in any case showered the last optimists on the West Coast: “It will be very hard, from now on, to bring a start-up to the baptismal font, sighs Mark Suster. Our industry has shot itself in the foot”.

Le Soir, 14/03/2023

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