“I think this could be the first cockroach in the cellar.”
Fredric Russell, CEO, Fredric E. Russell Investment Management Co., on the collapse of Silicon Valley Bank (aka SVB) – the second largest banking collapse in U.S. history.
mar 12, 2023
Why It Matters: The list can be long here so let's focus on two:
- SVB served many tech companies that now have no clarity on whether they can access their funds, pay their employees or continue their work.
- Questions remain about whether other banks could face the same risks and fate.
What Happened: “a good ol’ run on the bank” (AP): Plainly put, concerns skyrocketed about the health of the bank and customers pulled out funds – so many funds that the bank had more obligations than cash and the U.S. government took it over.
Why It Happened: Several reasons that we know of *so far* based on reports:
The bank provided services to companies that often depended on investors (start-ups) but a lot of that start-up cash has slowed as concerns have risen about the economy, interest rates, inflation, etc.
These companies have turned to the cash they had in the bank.
As The Associated Press describes, the bank bought bonds with customer deposits (this isn't usually "risky" but a "safer" bet. A bank can typically make money on bonds before having to actually return that money to their customers).
But when more customers need the cash from the bank (because they don't have an active outside investor providing funds or they become concerned about the bank's stability) this creates a problem.
SVB reportedly had to sell the bonds earlier than they wanted to fill these obligations, making less money and essentially not getting enough money from their investment. SVB simply couldn't do business.
Then there's human nature: Some customers have said they heard the bank was having problems, and they reacted – pulling funds out. That "en masse" is a run on the bank.
When: This all happened at the end of last week, Wednesday - Friday.
Who's To Blame: Too soon to tell if there's one person, one strategy to blame.
Who's Impacted: A range of small to large tech companies. Think hundreds of thousands of people. The bank recently reported having $169 billion in assets – the 16th largest in the U.S.
What's Next: We'll see if another bank will want to buy SVB, effectively "bailing" it out. If that doesn't happen, the U.S. government insures up to $250,000 in deposits at FDIC insured banks. It will be a complicated process for customers to get their insured funds, and no guarantee on any funds.
Will This Spread:
Two different points-of-view:
From The Associated Press
"IS THIS A SIGN THAT WE COULD REPEAT WHAT HAPPENED IN 2008?
At the moment, no, and experts don’t expect there to be any issues spreading to the broader banking sector.
Silicon Valley Bank was large but had a unique existence by servicing nearly exclusively the technology world and VC-backed companies. It did a lot of work with the particular part of the economy that was hit hard in the past year.
Other banks are far more diversified across multiple industries, customer bases and geographies. The most recent round of “stress tests” by the Federal Reserve of the largest banks and financial institutions showed that all of them would survive a deep recession and a significant rise in unemployment.
However there might be economic ripple effects in the Bay Area and in the technology start up world if the remaining money can’t be released quickly.
From The Wall Street Journal - the focus in this article if you'd like to read more shares some concerns that regional banks (smaller banks) could be impacted.
"There are major differences between the current stress in the banking sector and the financial crisis of more than a decade ago.
Silicon Valley Bank ran into trouble in part by investing heavily in government bonds and agency-backed mortgage securities, which have declined in value as the Fed has raised interest rates."
Those bonds, however, are essentially guaranteed to be paid back in full at maturity, making them worlds apart from the complex credit instruments tied to riskier mortgages that helped fell financial institutions in the late 2000s.
Far from shunning Treasurys on Friday, investors flocked to them, betting that the problems in the banking sector could slow economic growth and eventually lead to lower interest rates.