Silicon Valley Bank (SVB), the second-largest banking institution in US history, shocked investors on March 8, 2023, by announcing that it needed $2.25 billion to strengthen its financial sheet. What followed was an utter destruction of SVB, resulting in aftershocks that rippled through the entire banking industry and the broader financial market. In this article, we will explore the curious case of SVB's collapse and the implications it has on the broader macroeconomy.
As startup clients withdrew deposits to keep their businesses going in a tough time for raising capital, the bank said it had to sell all of its $21 billion bond portfolio that largely consisted of US treasuries, with a realized yield of around 1.7%. This move resulted in a loss of $1.8 billion for SVB. The bank's short-term capital position quickly eroded, with multiple withdrawal requests from VC firms. Fearing that their deposits would be compromised, customers withdrew $42 billion of deposits. By the close of the day on March 9, 2023, SVB had a negative cash balance of $958 million. All these factors led to a classic bank run.
Next to come in this knockout round of punches thrown at SVB was a decision to sell equity. Ultimately, that move collapsed, and the Federal Deposit Insurance Corporation (FDIC) announced that SVB was shut down, placed in receivership, and client funds would be ensured up to $250,000 USD. This was a shock to depositors, consisting of tech-heavy startups with hundreds of millions in seeding funds and dry powder.
With plenty of news swirling around and uncertainty of depositor funds being recouped, Secretary of the Treasury Janet Yellen claimed no bank bailout would be made. Fear and panic of the thought that the 2008 financial crisis was back in full effect filled the minds of investors, leading to a fall in all major stock markets and a shot in confidence in banks. Seeing the contagion effect, announcements from the White House indicated that all depositors would be made whole on their deposits. However, shareholders and bondholders would not share the same fate and may be the victims of the foundation of capitalism, hence a full-blown loss.
On Monday, March 13, 2023, Chinese banking giant and one of the largest banks in the world, HSBC, bought the UK branch of SVB for a nominal fee of one British pound. The deal means that one of the biggest banks in the world, with $2.9 trillion in assets, will take over the failing British part of the tech lender. It ended a long weekend of dialogue between the government, regulators, and potential buyers.
On a macroeconomic scale, since the past year, US companies have been burdened with the harsh reality of a drastic rise in interest rates (from as low as 0.5% rates in 2020 to 4.75% in 2023 and counting). For the month of March, highlights surrounding the debt ceiling show that we are at the start of another round of putting the country's finances on the line. The disagreement could hurt the country's economy, and businesses in the middle market are already paying a price in the form of higher costs to borrow money. U.S. stock is growing twice as fast as sales. As a whole, sales are growing at half the rate of inventory growth. The increase makes it more likely that companies will have too many supplies at a time when demand is falling.
The troubles faced by Silicon Valley Bank are not isolated incidents but rather symptoms of the broader macroeconomic environment. The drastic rise in interest rates, as mentioned earlier, has put immense pressure on US companies, particularly on those in the tech industry that often rely on venture capital funding to sustain their operations. With higher interest rates, it becomes more expensive for these companies to borrow money, leading to increased financial strain.
Furthermore, the disagreement over the debt ceiling and the potential harm it could cause to the economy only adds to the uncertainty and risk for financial institutions such as Silicon Valley Bank. The stock market's volatility and the slowdown in sales growth only exacerbate the challenges that banks face.
The collapse of Silicon Valley Bank is a cautionary tale that serves as a stark reminder of the inherent risks associated with investing and banking. The events that transpired in the span of two days highlight the fragility of the financial system and the consequences of unchecked risk-taking.
As for the wider implications of Silicon Valley Bank's downfall, it serves as a warning sign to all financial institutions that prudence and caution should be exercised at all times, especially during times of economic uncertainty. Furthermore, it underscores the need for sound macroeconomic policies that balance growth and stability, as the failure of one institution can have far-reaching consequences for the entire economy.
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