two ways. Gradually, then suddenly. This is how Silicon Valley Bank (svb), which is the 16th largest lender in America, with assets of about $200 billion. Her financial situation deteriorated over several years. But only two days elapsed between the San Francisco-based bank’s March 8 announcement that it was seeking $2.5 billion to plug a hole in its balance sheet, and the announcement from the Federal Deposit Insurance Corporation, which regulates US bank deposits, that – that svb to fail.
svbshare price 60% after the disclosure of the capital increase. Greg Baker, its CEO, urged customers to “support us as we have supported you.” Unconvinced, some venture capitalists asked portfolio companies to operate. Bill Ackman, a hedge fund manager, suggested that the government should bail out the bank. By the morning of March 10, its shares had fallen another 70% or so in pre-market trading, before trading was halted. CNBCa television network, reported it svbHis capital raising efforts had failed and the bank was seeking to sell itself to a larger institution. Then came the announcement of the organizers.
These events raise two questions. The first is how svb I got into this situation. The second is whether its troubles are just an anomaly, or an omen of doom for financial institutions in a big way.
Start with the first. svb It is a bank for startups. I opened accounts for them, often before the big lenders bothered. He also lent them, which other banks are reluctant to do because few startups have assets to collateral. As Silicon Valley has boomed over the past five years, so has it svb. Her customers were pouring in the money. They needed to hoard money more than borrow.
thus svbIts deposits have more than quadrupled — from $44 billion at the end of 2017 to $189 billion at the end of 2021 — while its loan book has only grown from $23 billion to $66 billion. Because banks make money on the spread between the interest rate you pay on deposits (often nothing) and the rate borrowers pay, having a much larger deposit base than a loan book is problematic. svb needed to acquire other interest-bearing assets. By the end of 2021, the bank had invested $128 billion, mostly in mortgage and Treasury securities.
Then the world changed. Interest rates rose as inflation took hold. This wiped out the enormous wealth in investment capital and caused bond prices to plummet, leaving them svb Uniquely exposed. Its deposits swelled when interest rates were low and customers were flooding in cash. Since the bank made investments during this time, it bought bonds at the peak price. With venture capital fundraising drying up, svbThe company’s clients reduced their deposits: they fell from $189 billion at the end of 2021 to $173 billion at the end of 2022. svb He was forced to sell his entire portfolio of liquid bonds at lower prices than I paid. The losses incurred on these sales, about $1.8 billion, left a gap that it tried to fill with a capital raise. When the bank went, it held about $91 billion in investments, valued at what they cost at the end of last year.
He was svb ‘s abnormality problems? It appears that the Bank was uniquely vulnerable to a run. Federal insurance, which was put in place after a series of panics hit the US economy in the 1930s, covers deposits of up to $250,000. This protects all the cash that most individuals would stash in a bank account. But it is unlikely to cover the money the company might keep. svb It is a bank not just for corporations, but a narrow subsection of them that has fallen on harder times than most. About 93% of its deposits were uninsured. Its customers, unlike those of most banks, had a real incentive to run — and they responded to it.
However, almost all banks have unrealized losses on their bond portfolios. if svb It is the bank most likely to be put in the position of having to stockpile bonds at their highest price, so it may not be the only bank suffering from price hikes. Janet Yellen, the Treasury secretary, says she is watching several banks in light of events in Silicon Valley. Fortunately, loan books make up a much larger share of assets than most other institutions. And as rates go up, they earn more.
The question now is whether there will be a bailout, and if so, how big it will be to make depositors whole. svb “It is the lifeblood of the tech ecosystem,” notes Ro Khanna, the congressman from California’s 17th District, which includes part of the Valley. They can’t let the bank fail. Whether that means it should be acquired by another company… or get help from or even a statement from the Treasury Department so that depositors can feel safe — I’ll leave that to the experts.”
Intervention will not be popular. But in the absence of clamping down on depositors may be the only option since then svb It was clearly not enough to cover the losses she had to incur from the assets. As long as the state is involved, said Larry Summers, the former Treasury secretary, there is nothing to worry about svb It will harm other parts of the financial system. Many people hope that this is the case, and that he is right. ■
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