It took 48 hours for Silicon Valley Bank (SVB) to become the second-worst bank failure in the United States, after the collapse of Washington Mutual in 2008. The context of the two, however, could not be more different. SVB is primarily focused on corporates as it is arguably the key liquidity player for tech startups and venture capitalists in the environment, while Washington Mutual was a business that was geared more towards retail clients .
This explains why SVB has a rather unbalanced portfolio when it comes to the nature of their deposits, with over 90% being uninsured deposits i.e. exceeding the FDIC insurance limit of $250,000. .
As such, this bank rush was not your usual in the sense that it happened to a rather particular bank, which catered to a rather unique sector of customers. Arguably, the risks involved may be more idiosyncratic, but it’s not that simple.
Let’s take a look at some relevant information to make sense of SVB’s supposed “sudden” collapse.
For starters, the warning signs are already there.
This is probably one of the best views on the underlying issues of SVB and guess what? He was released on January 18. It covers the whole HMT issue, which Adam also pointed out here. Essentially, rising interest rates are becoming more and more of a problem for banks as they take a hit to their bond portfolio.
This article from the (possibly closed) Wall St Journal from last year is also a warning that SVB are not the only player facing such tensions. There are a few big names involved, but maybe their risk and credit management isn’t as bad as what was going on at SVB.
The saying tends to say that the fed usually goes up until something breaksand maybe that’s it something.
Now SVB is not your “too big to fail” kind of market player and maybe that’s why we’re having a bit of a debate about whether lawmakers and policy makers could actually step in to bail out the situation.
Basically, that’s where we are now.
In terms of their immediate exposure to customers, some big names are directly impacted by SVB. You can view the individual disclosures here if you want to go into more detail. The list below is accurate as of the March 10 ranking (h/t Ben Hoban @wbhoban for doing a neat summary for some of the most relevant):
Roku is obviously one of the biggest names on the list and having around 26% cash balance exposure is a big risk.
The real fear is how it all ripples out to related parties and how it all relates to other companies not directly involved with SVB. The potential ripple effect can be massive, but again, it’s all mostly taking place in this ecosystem of tech startups.
To put it more bluntly, this is not about the collapse of the main banking sector and the financial system of the economy. That’s about right a bankruptcy of a particular bank in a rather niche ecosystem which represents only a part of the economy.
Now, this does not mean that the risks associated with such a failure should be ignored. Always remember that markets and in this case humans are driven by emotions at their very core. And to fear is extremely powerful, to say the least.
The traumatic experience of the global financial crisis will certainly rekindle many over the weekend and tomorrow people will be looking to the FDIC to try to negotiate a sale of SVB to try to allay fears of further contagion. widespread.
Now, in a more logical sense, SVB doesn’t quite have the status to cause a 2008-09 domino effect in the financial system but the fear that he might, might have that kind of potential. Essentially, it’s sort of self-fulfilling as the over-the-top, sensationalized headlines spread panic and hysteria, and everyone’s reaction is swayed into thinking “it’s Lehman Brothers again.”
So what’s the next step?
All eyes will be on whether we will see SVB get taken over by another market player and that will happen on its own, in the sense that it will cover depositors (yes, including those who are uninsured) and the fear of contagion stops there.
I think the FDIC and the Fed wouldn’t want to see tech startups go bankrupt en masse and the best way to prevent something messy from happening would be exactly that.
I mean, there is definitely a real possibility that SVB will die and have to sell all of its assets with a haircut, without covering all of its depositors. However, this is the worst case scenario and something lawmakers and policymakers would actively want to avoid, as it could potentially trigger bank runs elsewhere as fear continues to spread.
I think next Monday the fear and distress in all markets would still be elevated and that might continue for a bit. This of course depends on negotiating a deal for the sale of SVB, which could possibly take some time over the next week.
In that sense, headlines will be everything. And if there is nothing, I think the markets will be comfortable selling first and asking questions later until the silence is broken. But the minute something hits the wires about an SVB deal, expect markets to turn their heads and risk trades to start to rally.
As always in times like these, I will always preach the mantra of buy value, sell hysteria.