On March 10 (Friday), SVB Silicon Valley Bank suddenly declared bankruptcy without warning, only 48 hours after the incident, which caused panic in the market, and the U.S. stock and cryptocurrency markets crashed. What happened?
The whole story
SVB Silicon Valley Bank is one of the top 20 banks in the United States. It has been in operation for more than 40 years and has total assets of US$211.8 billion by the end of 2022. As its name suggests, the bank mostly provides financial services to technology start-ups and employees of large factories in Silicon Valley, and it is the bank with the largest deposits in Silicon Valley.
On March 9 (Thursday), SVB Silicon Valley Bank announced a liquidity crisis. The stock price of SVB Financial Group, the parent company of Silicon Valley Bank, plummeted by 60%, and led to the collapse of US bank stocks. The three major US stock indexes all fell.
The charts in this article are all from tradingview
After the incident broke out, more and more institutions and high-net-worth customers rushed to withdraw cash from the bank, and the bank suffered a run, which pushed up panic and accelerated its bankruptcy process.
Why did this good bank suddenly encounter disaster?
To put it simply: low-interest deposits-over-allocation of MBS-short-term liquidity shortage-sell MBS to stop losses-cause panic.
The SVB Silicon Valley Bank incident is directly related to the Fed’s monetary policy and bank liquidity management. With the global pandemic in 2020, the Federal Reserve launched unlimited quantitative easing (QE), and the benchmark interest rate dropped to around 0%. In the next two years or so, American technology companies continued to launch repurchases, companies took the opportunity to raise a large amount of funds, and Silicon Valley Bank absorbed a large amount of deposits.
Banks use a large amount of deposits for relatively stable carry transactions, mainly in various types of US bonds. SVB bought more than 65% of its deposits into MBS (housing mortgage loans). Under normal circumstances, there is no problem with this “borrowing short to buy long” model. As long as the holding expires, the principal and interest can be returned.The problem isSVB over-allocation and Fed shift to rate hikes.
The Fed’s aggressive interest rate hikes have greatly changed the macroeconomic environment and pushed up interest rates. Silicon Valley startups are no longer spending money, and there are more layoffs and closures, while banks pay depositors higher and higher interest rates as interest rates rise. In the end, SVB Silicon Valley Bank faced continuous withdrawals and high interest rates from customers, and short-term liquidity became extremely tight.
SVB had to sell the MBS in its hands to realize it. At this time, the market interest rate had increased from 0 to the 2-year yield close to 5%, and the asset price fell a lot at the same time. SVB sold 21 billion US dollars of assets and lost 1.8 billion US dollars.
SVB can withstand the loss of US$1.8 billion. The problem is that SVB still holds more than US$100 billion in MBS. A run on this part may cause a loss of US$15 billion. SVB is truly insolvent. Under this expectation, investors panicked.
event impact
1. SVB declared bankruptcy without warning.
After the panic fermented, the Silicon Valley Bank experienced a $420 withdrawal run, and the liquidity was directly dried up; the stock price of SVB Financial Group plummeted 60% in a single day, and continued to fall after the market, shattering the management team’s plan to sell stocks for self-rescue, and the management team lost confidence , directly declared bankruptcy. It took only a year for its stock price to fall from $700 back to $100.
2. The chain reaction between the stock market and the cryptocurrency market.
From the SVB Silicon Valley Bank incident, investors wonder whether other banks are also suffering from the negative impact of the Fed’s aggressive interest rate hikes and high interest rates, and whether there will be more bank storms. Emotions have affected the U.S. banking industry. As the core asset in the U.S. stock market, the sell-off of bank stocks is a suppression of the U.S. stock market. At the same time, concerns about the financing and liquidity of large technology companies erupted.
The incident also spilled over into the cryptocurrency market. It’s hard to say that SVB Silicon Valley Bank has nothing to do with the cryptocurrency industry. Circle, the issuer of the stablecoin USDC, has announced that $3.3 billion in cash is deposited in Silicon Valley Bank, accounting for almost 8% of USDC’s 40 billion scale. As for the currency circle companies that have not yet issued an announcement, when will there be a thunderstorm?
Market Reaction
At present, the SVB Silicon Valley Bank incident mainly impacts the US stock market and the cryptocurrency market, and the market sentiment is not good.
The general downturn in U.S. banking stocks dragged down the three major U.S. stock indexes, notably the Dow Jones. The Dow Jones Index has been consolidating in the range of 32500-34500 for more than 4 months, and the possibility of forming a “double top” has increased. The event became the most critical factor for the Dow to break down. “If you store it for a long time, you must pay attention to it.” Next, it is advisable to pay attention to the volatile downward trend of the Dow, and the target may point to the 30,000 mark again.
It is heard that the price of Bitcoin has broken through the 22,000 support. If the 20,000 line falls, it will return to the weak order below 20,000, marking the end of the token rebound, and further falling below 18,000 may further set a new low.
As the largest bankruptcy case in the U.S. financial industry since the 2008 financial crisis, the incident is not enough to cause systemic risks in the U.S. financial industry, but it is necessary to pay attention to the development of local risks.
A growing number of Silicon Valley and financial figures are calling on the government to push another bank to assume responsibility for SVB’s assets and liabilities to limit the risk of the bank’s failure and possible doom for technology companies.
The Federal Deposit Insurance Corporation (FDIC) says it will insure up to $250,000 per depositor, but most of SVB’s reserves hold more than that amount.
The FDIC and the Federal Reserve will brief California lawmakers on the situation at SVB on March 12 at 11:00 ET (March 13 at 11:00 GMT+8).
(by Arthur)
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