Immediate concerns of widespread contagion have been contained by the United States (US) government’s quick response in guaranteeing all deposits of the customers of Silicon Valley Bank (SVB) and Signature Bank (SBNY.O) in that country.
The U.S. Federal Deposit Insurance Corporation on Monday said it had transferred all SVB deposits to a newly created bridge bank and that all depositors would have access to their money beginning Monday morning.
President Joe Biden’s economic team worked with regulators over the weekend on measures which aimed at guaranteeing deposits in both banks, setting up a new facility to give banks access to emergency funds and making it easier for banks to borrow from the Federal Reserve in emergencies.
“The American people and American businesses can have confidence that their bank deposits will be there when they need them,” Biden said in his statement on Sunday.
“I am firmly committed to holding those responsible for this mess fully accountable and to continuing our efforts to strengthen oversight and regulation of larger banks so that we are not in this position again,” Biden wrote.
Four decades ago, SVB was born in the heart of a region known for its technological prowess and savvy decision making.
The California-headquartered organisation grew to become the 16th largest bank in the US, catering for the financial needs of technology companies around the world, before a series of ill-fated investment decisions led to its collapse.
As the preferred bank for the tech sector, SVB’s services were in hot demand throughout the pandemic years.
The initial market shock of Covid-19 in early 2020 quickly gave way to a golden period for startups and established tech companies, as consumers spent big on gadgets and digital services.
Many tech companies used SVB to hold the cash they used for payroll and other business expenses, leading to an influx of deposits. The bank invested a large portion of the deposits, as banks do.
The seeds of its demise were sown when it invested heavily in long-dated US government bonds, including those backed by mortgages. These were, for all intents and purposes, as safe as houses.
But bonds have an inverse relationship with interest rates; when rates rise, bond prices fall. So when the Federal Reserve started to hike rates rapidly to combat inflation, SVB’s bond portfolio started to lose significant value.
If SVB were able to hold those bonds for a number of years until they mature, then it would receive its capital back. However, as economic conditions soured over the last year, with tech companies particularly affected, many of the bank’s customers started drawing on their deposits.
SVB didn’t have enough cash on hand, and so it started selling some of its bonds at steep losses, spooking investors and customers.
It took just 48 hours between the time it disclosed that it had sold the assets and its collapse.
What triggered the run on the bank?
Given banks only keep a portion of their assets as cash, they are susceptible to a rush of demand from customers.
While SVB’s problems stem from its earlier investment decisions, the run was triggered on 8 March, when it announced a $1.75bn capital raising. It told investors it needed to plug a hole caused by the sale of its loss-making bond portfolio.
“Suddenly everyone became alarmed that the bank was short of capital,” says Fariborz Moshirian, professor at UNSW and director of the Institute of Global Finance.
Customers were now aware of the deep financial problems at SVB, and started withdrawing money en masse.
Unlike a retail bank that caters for business and households, SVB’s clients tended to have much larger accounts. This meant the bank run was swift.
Two days after it announced it would raise capital, the US$200bn company collapsed, marking the largest bank failure in the US since the global financial crisis.
Source: The Guardian