/View.info/ Silicon Valley Bank’s fatal mistake
The fact that America is facing a crisis in the near future began to be talked about in the middle of last year, when it became clear that the Federal Reserve had taken a course towards tightening monetary policy. The US central bank has started to raise the key interest rate, justifying it with the need to suppress inflation, which has reached record levels.
Such a policy has been sharply criticized: monetary tightening will not overcome inflation, but will cause a crisis. First, because loans will become prohibitively expensive for companies from the non-financial sector of the economy. Second, because many banks will begin to write down their assets. After all, the assets of banks in recent years have been formed at the expense of treasury and mortgage securities with a very low interest rate (it was low because the main rate of the US Federal Reserve was close to zero).
When the Federal Reserve began rapidly raising interest rates a year ago (today it is in the 4.50-4.75% range), many long-term securities (especially Treasuries) in the assets of banks, insurance companies and mutual funds began to depreciate . Who is going to pay even par for paper that has a ridiculous yield of 1 – 2 percent max?
Federal Reserve Chairman Jerome Powell got excited last spring when he said part of the monetary tightening would be to reduce the Fed’s assets by selling its long-term portfolio. In this way, the American central bank would compress the money supply in the country and limit the inflationary growth of prices.
The very first sale of securities resulted in losses for the US central bank on a monthly basis, so the Federal Reserve is now slowing down the sale of its portfolio. As of March 2022 the money supply was $21.8 trillion, it is now $21.2 trillion It is unlikely that inflation will be contained by such token cuts.
The first major American lender to reveal its hidden losses was Silicon Valley Bank – SVB, which ranks 16th in the ranking of American banks by assets (at the end of 2022 – $212 billion). Today, SVB is compared to the American investment bank Lehman Brothers, which collapsed in 2008 and triggered the next phase of the financial crisis of 2007-2009.
Just to remind you that SVB collapsed on March 10. The bank was established in 1983, specializing in servicing high-tech companies (hence the name “Silicon Valley Bank”). It was able to weather such financial storms as the crash of the NASDAQ stock market at the end of the 20th and the beginning of the 21st century and the financial crisis of 2007-2009. The rapid growth of the bank was recorded at the beginning of the second and third decades of 21st century: deposits more than tripled from $62 billion at the end of 2019 to $189 billion at the end of 2021.
And at about the same time, the bank made a fatal mistake: the “pandemic” hit high-tech Silicon Valley, the demand for loans from businesses involved in high-tech start-ups fell sharply.
SVB Bank began to replace loans with assets in the form of treasury and mortgage-backed securities. At the beginning of 2022, of the bank’s 212 billion in assets, 55% were invested in US government bonds. It was a ticking time bomb that went off.
At the end of 2022, the bank had $157 billion in deposits in just 37,000 accounts. Withdrawal of funds from deposits was also observed before March 10, but it had a creeping nature. SVB sold at a loss the Treasury securities in its portfolio to meet the demands of depository clients.
After selling off $21 billion in securities, the bank reported a loss of $1.8 billion. The loss prompted the bank to announce an additional $1.75 billion share issue to shore up capital. However, the announcement of losses and the additional issue backfired on the bank, provoking a collapse in the bank’s share price and raids by depositors in the bank. SVB shares fell 60% on March 9. In total, customers withdrew $42 billion in deposits, after which a classic banking collapse ensued.
Experts analyzing the causes of the collapse estimated that in reality SVB’s deposits were about one and a half times higher than the bank’s assets, calculated at their current market value.
Almost simultaneously with SVB, another Californian bank, Silvergate Bank, was on its way to collapse, although it was significantly smaller in assets ($11 billion). His clients were mostly cryptocurrency firms.
The bank’s troubles began last year when its customers faced the collapse of the FTX crypto exchange and began withdrawing money from the bank. The bank began to suffer losses from the forced flash sale of securities. On March 8, it announced plans to cease operations and liquidate.
“Silicon Valley’s bank is just the tip of the iceberg,” Christopher Whalen, chairman of the financial advisory firm Whalen Global Advisors, said on March 10. The big players are likely to withstand the coming shocks, he predicts. “but many smaller firms will get a good shake”. “Many of them will have to raise equity,” Whalen said.
On March 10, experts were wondering: who will be next (after SVB)? The answer came quickly. On March 12, regulators shut down New York-based Signature Bank ($110.4 billion in assets).
Many other banks are also fluctuating, as evidenced by the stock market quotes. First Republic Bank (14th in the ranking of US banks by assets) decided to reassure its customers: it announced that it had replenished the available funding through the Fed and JPMorgan. But it turned out to be just the opposite. On March 13, shares of First Republic Bank plunged 75% and trading was halted.
On the same day, shares of PacWest Bancorp fell 54% and were suspended. Shares of KeyCorp fell 38% and trading was also halted, while Comerica Inc. dropped by 44%. Due to a sharp drop in quotes, trading in the securities of Charles Schwab, Western Alliance, PacWest, ZIONS Bancorp, Regions Financial, Customers Bancorp was temporarily suspended. Even Wall Street’s top banks sank, with JPMorgan Chase & Co down 1.3 percent and Bank of America Corp down 4.5 percent.
The wave of panic went beyond the US and conquered other countries. On March 13, European and Asian shares of credit institutions fell, dragging stock indexes down with them. The pan-European Stoxx 600 fell 2.5%, while European banking shares fell an average of 6%, Commerzbank lost 12%, Credit Suisse lost 9.4% and HSBC lost 3.5%.
Thus, in less than a week in the USA, three banks with assets worth $333 billion went bankrupt. Already on March 10, the influential billionaire investor Bill Ackman said that the government must act quickly, otherwise there will be a panic withdrawal from the banks, as in 30- those years of the last century.
US President Joe Biden said on March 13 that authorities would guarantee SVB depositors’ access to their deposits, but that the bank’s management would be held accountable and rules on credit institutions would be tightened. The current head of the White House blamed his predecessor Trump for easing the requirements for credit institutions, which led to the collapse of SVB.
Donald Trump predicts the dire consequences of what is happening: “Based on what’s happening with our economy, Joe Biden will become the Herbert Hoover (US president from 1929 to 1933) of the modern age. We will have a great depression, much worse than the one in 1929. To prove my point, the banks have already started to fail.
A joint statement by the US Treasury, the Fed and the FDIC (Federal Deposit Insurance Corporation) was immediately released on March 12. It states that from March 13, SVB and Signature Bank depositors will have full access to their deposits.
Let me remind you that the US insurance system covers deposits up to $250,000. About 95% of deposits in SVB exceed the insured amount. The statement said, but not very clearly, that compensation would also be made for deposits not covered by insurance. That the Federal Deposit Insurance Corporation will receive additional liquidity to meet the demands of depositors.
There is no doubt that the whole of America (and perhaps the whole world) will be watching closely how the operation to save the depositors of two American banks proceeds. I think the Treasury, the Federal Reserve, and the FDIC will need to be released as quickly as possible to meet the requirements not only for the insured portion of the deposits, but also for the remaining (uninsured) portion of them.
The consequences of the collapse of SVB are many. US business is particularly interested in how the March 10 event could affect the Fed’s key interest rate. Jerome Powell threatened to keep raising her until the end of this year. Now the probability of that is zero. The only point of contention is whether the rate will be frozen at the current level or will have to be reduced.
And we are already seeing the consequences of the March 10 event both in Europe and elsewhere, where the stock market quotations of many banks fell and continue to fall. There appears to have been some discernment among investors, an understanding that bank assets have lost some of their original value and may not be sufficient to cover deposit liabilities.
So far, fortunately for other countries, there have been no mass raids of depositors in the banks there. SVB is an international structure with branches and affiliates in Europe, India, Israel and China. The closure of the bank means the closure of its foreign branches and the automatic termination of services to local high-tech companies. In order to save the hundreds of English companies served by the British branch of SVB, the country’s monetary authorities agreed with the world-famous bank HSBC to buy this branch for the symbolic sum of 1 pound sterling.
I remind you that almost 15 years ago in the USA a situation similar to the one I outlined above arose. After the collapse of Lehman Brothers, many predicted that what happened in the early 1930s would happen in America. In the 1920s, there were up to 30,000 banks in the country. After October 1929 until the end of 1933, 9,000 credit institutions went bankrupt.
In the late 2000s, US authorities did everything possible to ensure that the disaster would not happen again. Trillions of dollars in loans from the Federal Reserve were thrown in to bail out the banks. In addition, the federal government provided aid from the budget in the amount of almost 2 trillion dollars (it is noteworthy that then government money was poured into the banking system in the form of stock purchases, that is, there was a temporary, or technical, nationalization of Wall Street banks).
The authorities then saved the present by moving the problems into the future, which was expressed in the hyperinflation of the Fed’s assets, the rampant expansion of the money supply, the inflation of the stock bubble, the construction of a pyramid of public debt, allowing the banks to invest (the repeal of the Glass-Steagall Act passed in 1933), deregulation of banks, etc.
Everything that the US monetary authorities have done in the last fifteen years cannot be called a solution to the problems. Monetary and financial policy has come down to delaying the crisis, moving it into the future. And now that future has arrived. It can be dated precisely – March 10, 2023, when SVB went bankrupt.
Translation: ES
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