Silicon Valley Bank collapses, tech startups reshocked!
Lehman Brothers 2.0, finally emerged.
On March 9, Silicon Valley Bank (SVB), the nation's 16th largest bank, suddenly plunged over 60%, evaporating $9.4 billion in market value.
On March 10, Silicon Valley Bank declared bankruptcy and was taken over by the Federal Deposit Insurance Corporation (FDIC). This is also the largest collapse of the U.S. financial industry since 2008.
What kind of bank is SVB?
Silicon Valley Bank (English: SVB) is an American financial institution headquartered in Santa Clara, California. SVB is one of the largest banks in the United States and is the largest local bank in Silicon Valley in terms of deposits.
With approximately $209 billion in assets and $173.1 billion in deposits, Silicon Valley Bank is ranked 16th in the U.S. banking industry, primarily funding venture capital companies in Silicon Valley, and is closely tied to venture capital throughout Silicon Valley. Specifically, Silicon Valley Bank focuses on lending to technology companies, provides a variety of services to venture capital, revenue-based financing and private equity firms investing in technology and biotechnology, and provides private banking services to high-net-worth individuals in its domestic market. It is worth noting that Silicon Valley Bank also participated in the Series A financing of Xanadu, a well-known light quantum company.
"Forty-four percent of U.S. venture-backed technology and healthcare IPOs are banked at SVB." Source: Silicon Valley Bank website
Some of Silicon Valley Bank's clients, among many technology companies, include.
1) Tech startups, hard tech companies such as Airbnb, Uber, Xanadu and LinkedIn.
2) Life science companies: Life science companies involved in biotechnology, pharmaceuticals, medical devices and healthcare, such as Illumina and Intuitive Surgical.
3) Venture capitalists and private equity firms: venture capital and private equity firms such as Sequoia Capital and Accel Partners.
4) Fintech companies.
5) Wine and beverage industry: Serving the wine and beverage industry, including wineries, breweries and distilleries, with banking and financial services tailored to their unique needs.
6) Corporate and Investment Banking Clients: Provides corporate and investment banking services to a range of clients, including mid-market and large companies as well as institutional investors.
Today, SVB is being taken over by the U.S. Federal Deposit Insurance Corporation (FDIC), simply put, the FDIC exists to bail out large banks and institutions: an important institution to rescue large financial institutions and banks from market panic and runs. and the important institution of the run.
In the United States, as long as the bank account in the FDIC, then the depositor's deposit is protected, in each bank's general account can get up to 250,000 U.S. dollars of protection. For retail investors this amount is sufficient, however, for large investors, such protection amount is a drop in the bucket.
At the same time, the FDIC is not supported by public funds; member banks' insurance premiums are its main source of funding. When dues and bank liquidation proceeds are insufficient, it can borrow from the federal government, or through the Federal Financing Bank to issue debt.
So now the status quo for many investors is that the FDIC took over and then on Monday these SVB investors are going to call the FDIC and then they are going to get a certificate of escrow and with those certificates of escrow (receivership certificate) they have priority in getting repaid. Before these investors are actually repaid, the FDIC needs to liquidate and sell the assets of SVB in order to gradually return these properties to these customers, and the wait will last for several years.
The bigger problem is that while the FDIC took over and said it would pay out to depositors, the startup deposited the money in Silicon Valley. But most of the money deposited by startups into Silicon Valley Bank is over $250,000, so it is not federally insured. It is estimated that the number could be as high as 97.3 percent. The survey shows that nearly 400 startups say they are at risk, and more than 100 say they may not be able to pay their salaries in the next 30 days.
Needless to say, SVB's collapse is undoubtedly doom and gloom for many tech companies.
So why did Silicon Valley Bank come to this bad end? We have to start with SVB's business model.
SVB is divided into the following four main businesses.
The principal SVB;
PB Business (Private Bank High Net Worth Asset Management);
SVB Capital (operates as a fund, allocating assets);
SVBLEERINK (SVB securities).
SVB's business model and depositor sources
As you can see, most of SVB's assets are treasury bonds and MBS related assets, and SVB only has $15 billion in cash on hand: most ($108 billion) of the money is locked up in these bonds and fixed income assets.
SVB is more of an investment banking structure designed for large Silicon Valley VC investors and clients. The essence of its business model is to provide a risk-based pricing for high-risk, high-potential businesses such as medtech and start-ups, and convert them into low-risk lending businesses to earn fees and interest.
It's like a pool, with large savers as the faucet, SVBs as the pool, and unicorns as the customers pumping the water.
The bigger tap, of course, is the Federal Reserve.
The reason for SVB's bankruptcy can be told from 3 years ago.
With the arrival of the 2020 epidemic, the Fed lowering interest rates to 0 and promising unlimited QE money printing, a global funding boom for tech companies, and rapid growth in loans and venture capital for startups, SVB's deposits, the most tech startup-friendly bank, skyrocketed - according to its quarterly earnings report, from June 2020- December 2021, the bank's deposits skyrocketed from $76 billion to $190 billion.
The massive inflow of capital means the bank's liability side is skyrocketing. As a profit-seeking institution, SVB, of course, needs to invest this money "safely" by buying the appropriate assets and earning interest spreads.
Fortunately, the Fed didn't start raising interest rates in 2020-2021, and almost all of the "safe assets" were yielding very low yields. Treasury holdings grew from $4 billion to $16 billion, and MBS grew from over $20 billion to $100 billion. At the same time, SVB's cash and cash equivalents on hand (including reserves, repos, and short-dated debt) have instead fallen from $14 billion to $13 billion.
During this period, SVB and almost all large U.S. financial institutions believed that the likelihood of interest rates rising and exceeding 2% in the future was very low, with the Fed paying only 0.1% for bank cash (reserves), while the combined annualized yield on its Treasuries was "as high as 1.49%" after SVB's operations, and the long-term MBS yields are "as high as 1.91%".
But here comes 2022: as inflation soars, the Fed begins a frenzied path of interest rate hikes.
By March 8, 2023, the yield on the 10-year U.S. Treasury note soared to 4%, and the 15-year fixed-rate mortgage rate rose to over 6%, meaning that SVB's holdings of Treasuries and MBS had, in essence, depreciated substantially. Some estimates put the total devaluation of its Treasuries at as much as $2.5 billion, while the total devaluation of its MBS could be as much as $15 billion.
Of course, the devaluation of SVB's bonds has occurred gradually over this time. Why didn't the market originally think SVB was in trouble?
The reason lies in the accounting rules.
After the 2008 global financial crisis, the Financial Accounting Standards Board (FASB) and the Association of Public Accountants (APB) made changes to the traditional market-to-market accounting rules in order to save the U.S. banking industry, which at the time was beset by "toxic assets". If a bank intends to hold a safe bond asset to maturity, the fluctuation in the market value of the asset does not have to be reflected in the earnings profit and loss (Profit and Loss).
However, the Fed's rapid rate hike so far in 2022 has also led to a number of technology companies have a hard time, financing can not be financed, the stock price has been falling, rent, wages, R & D investment in a variety of expenses can not stop, SVB's deposits began to continue to flow out, to the end of 2022 a calculation, the annual net decrease in deposits 16 billion, especially those non-interest-bearing deposits, from 126 billion plummeted to 81 billion ( The federal funds rate is almost 5%, so the number of demand deposits that foolishly exist in accounts without interest will of course decrease), which greatly increases the pressure on SVB's cash outlay.
With the gradual depletion of cash reserves, on March 9, SVB announced the sale of $21 billion in bonds, which is equivalent to turning a $2 billion floating loss into a real loss - if this $2 billion real loss, it is not to say that you can not refinance, the problem is, you still have $15 billion floating loss not out it!
In this case, how can the market give you financing again? This is the core reason for the plunge in SVB's share price on March 9.
After SVB's announcement of the bond sale, talk of a liquidity crisis spread through Silicon Valley, and any tech company that knew about it was desperate to withdraw funds from SVB.
The liquidity crisis became a self-fulfilling prophecy as numerous tech companies quickly withdrew their deposits from SVB.
At the end of 2022, SVB had total assets of about $209 billion and deposits totaling about $175.4 billion, and by the end of the day on Thursday, customers had withdrawn as much as $42 billion in deposits. By the end of the day, SVB had a cash balance of -$958 million and had failed to scrape together enough collateral from other sources, the regulator said.
Just like that, in one day, SVB's liquidity was completely drained and turned negative, based on which the California Department of Financial Protection and Innovation (DFPI) announced Friday that it was closing SVB and appointed the Federal Deposit Insurance Corporation (FDIC) as receiver.
Silicon Valley Bank Failure Timeline
And so, a textbook classic, balance sheet collapse to bank run crisis played out in plain sight, with SVB unfortunately becoming the first U.S. insured banking institution to fail with the FDIC in 2023, the second largest bank failure in U.S. history.
In the wake of the Silicon Valley Bank meltdown, the top 10 U.S. regional banks are most likely to be under pressure - and public opinion is speculating as to who will be the next Silicon Valley Bank.
Among them is First Republic Bank (FRC), which like Silicon Valley is based in California, so on March 10, First Republic said it has a strong savings capital base and very good diversity. The liquidity position is also very strong. Only 4% of its savings are currently related to the technology sector.
The Silicon Valley Bank crisis has also triggered other national regulators to pay attention to Silicon Valley Bank's local subsidiaries and the potential risks in the banking sector.
According to people familiar with the matter, the Prudential Regulation Authority (PRA) under the Bank of England is closely tracking the situation in the U.K. banking sector and the broader market, and is in close contact with the financial institutions under its supervision. A spokeswoman for Germany's financial regulator BaFin also said, "Current developments are being considered and specific measures will be reflected in our ongoing supervision."
However, Wall Street analysts appear more optimistic about whether the Silicon Valley bank meltdown is brewing into a crisis for the entire financial system. They believe that it is unlikely to cause broader banking problems, and that Silicon Valley Bank's troubles will not spread in the banking sector, and that the industry as a whole will not be affected, especially the big banks.
Morgan Stanley believes that other regional banks will not be affected by the contagion. JPMorgan believes that the market sell-off is an overreaction.
On March 11, the U.S. White House issued a statement saying that President Joe Biden spoke with California Governor John Newsome about the matter on March 11. "(Biden) the president and the governor of California spoke about Silicon Valley banks and efforts to address the situation," but no further details of the talks were released.
