On Friday March 10, Silicon Valley Bank, a subsidiary of SVB Financial Group (ticker: SIVB), failed.
It marked the end of a rapid descent for the technology-focused commercial lender, which in 48 hours had gone from the 16th largest bank in the country to the second largest bank failure in US history, behind only the Washington Mutual’s 2008 implosion into the depths of the financial crisis.
Here’s a quick rundown of the crisis, what’s at stake, how things have escalated, and potential implications for the future:
- What is at stake in the failure of SVB.
- How SVB failed.
- Consequences and questions.
- Result for investors.
What are the stakes of the failure of SVB
Investors in SIVB shares will suffer a catastrophic and total loss. But beyond individual shareholders, the fear over the weekend was about depositors’ capital and the potential for cascading economic effects. Would banking firms with Silicon Valley Bank, which comprised about 50% of all US venture-backed startups, be able to make the payroll? Would trust in regional banks as a whole erode entirely?
The first of those questions was answered Sunday night, as federal regulators announced a plan to allow all SVB customers — even those with more than $250,000 in FDIC-insured deposits — to have access to their capital from Monday.
The Treasury Department labeled SVB as well as Signature Bank (SBNY) systemic risks, giving the government broad authority to take creative steps to liquidate the two banks in the least disruptive way.
Importantly, these measures are not bailouts and taxpayers should not suffer any losses: banks that benefit from the program will pledge treasury bills and other high-quality collateral in exchange for loans to short term. liquidity in the form of federal loans.
Signature Bank was overtaken by the FDIC on Sunday, two days after SVB, quickly becoming the third-largest bank failure in US history. Signature Bank was heavily exposed to cryptocurrency sector, which has been in turmoil for more than a year following a series of aggressive moves by the Federal Reserve interest rate hikes.
Signature’s collapse follows crypto lender Silvergate Capital Corp’s announcement last week. (AND) that it would voluntarily terminate its activities. He expects all depositors to be healed.
The common denominator of the three bank failures was aggressive overexposure to parts of the economy that were highly vulnerable to historically rapid interest rate increases: technology sector and the cryptocurrency industry.
On Monday afternoon, it appears that San Francisco-based regional bank First Republic Bank (FRC) could be the next victim of the crisis, with shares plunging almost 80% in morning trading despite several announcements from the bank the day before emphasizing the bank’s “security and stability”. The company announced that it had gained access to additional liquidity from the Federal Reserve and JPMorgan Chase & Co. (JPM).
How SVB failed
Several factors contributed to the sudden collapse of SVB:
- Overconcentration. It’s in the name – Silicon Valley Bank was a go-to lender to the tech sector, especially venture capital-backed tech startups. The tech sector was hammered as rates soared from zero to 4.5% in just one year, prompting tech layoffs, plummeting valuations and a decline in private financing.
- Reckless exposure to bonds. Last week, SVB faced a potential credit downgrade from Moody’s as the bank had racked up heavy unrealized losses on long-term contracts. treasury bonds. While she intended to hold them to maturity to recoup her full investment plus interest, the bank’s liquidity position was ultimately too precarious to wait that long. Despite last Wednesday’s decision to raise $2.25 billion in equity, Moody’s downgraded SVB’s credit rating hours later.
- A rush to the bank. News of the planned capital raise and downgrade sparked an old-fashioned bank rush on Thursday, and SIVB stock plunged more than 60% as depositors rushed to withdraw funds. Treasuries and mortgage-backed securities considered safe haven were sold with heavy losses, as they were bought during a period of low interest rates and sold after a series of historic interest rate hikes. Bonds fall when interest rates rise.
Implications and issues
Despite the government’s decision to boost confidence and guarantee depositors’ capital over the weekend, the situation remains fast and volatile, and there is a lot of uncertainty as to how things will develop from here.
Here are some of the implications of the crisis as it currently unfolds:
- Regional bank risk. The precipitous drop of more than 70% in First Republic Bank’s morning trading on Monday shows that the market is far from confident in SVB’s closest perceived peers. Trading in a number of regional bank stocks was halted on Monday morning due to a sharp sell-off in the share price.
- USDC peg broken. The USDC stablecoin, which is believed to trade 1-to-1 with the US dollar, broke its peg over the weekend, trading as low as 86 cents after news broke that Circle, the company behind USDC, had $3.3 billion with SVB. The price has almost fully normalized following the federal guarantee of depositors’ money, and USDC is trading around 99.8 cents on Monday afternoon.
- Emerging concentration risk. This crisis is bad not only for over-concentrated regional banks, but for regional banks more generally, as venture-backed companies and small and medium-sized businesses of all stripes may be incentivized to transfer funds to banks better guaranteed and more diversified. big banks. The country’s biggest banks can also step in opportunistically with usurious financing deals or acquisitions of smaller players, gaining the accounts and relationships that smaller banks have taken decades to establish.
- Large banks largely isolated. Due to stringent capital requirements and regular stress tests instituted in the wake of the 2008 financial crisis, the country’s largest banks ultimately do not appear vulnerable here and could in fact benefit as sources of capital. capital and stable hands during the current period. volatility.
With the crisis unfolding for less than a week, a number of questions remain:
Was the SVB race intentional? Part of what made SVB so vulnerable to a run was the fact that capital risk The outfits had dozens of holding companies under their umbrella, all doing business with SVB. Following SVB’s planned capital raise and credit downgrade, a number of venture capitalists called the companies they were funding and ordered them to immediately withdraw their funds from SVB, triggering the Thursday bank run.
While some VCs have taken the opposite strategy, standing firm with SVB, some of the VC world’s biggest players, including a16z, Founders Fund, Y Combinator and Sequoia Capital, have not signed on. statement of support to the bank last. Friday. This sparked speculation that the race may have been engineered by some VCs in order to disrupt competitors, although no strong evidence was provided to support this theory.
Will buyers take over struggling regions? It’s not just the biggest and best capitalized banks that could emerge as buyers of the remnants of SVB and its peers. Last Friday, Tesla Inc. (TSLA) and Twitter CEO Elon Musk tweeted “I’m open to the idea” in response to a Twitter user saying the social media platform should buy SVB to become a digital bank.
Has there been harmful insider trading at SVB? On Feb. 27, less than two weeks before the FDIC passed SVB, CEO Gregory Becker sold more than $3.5 million worth of stock. That same day, CFO Daniel Beck sold $575,000 worth of stock. There is nothing illegal about management selling stock, but the timing of those sales may raise questions about what those executives knew at the time of the trades. If the arrangements were made as a result of material nonpublic information, the executives could potentially face civil and criminal penalties.
Conclusion for investors
The bigger question, however, is to what extent these failures of the past week will continue to impact the banking sector, whether other businesses will fall as a result, and what that means for confidence in regional banks. in the future.
The banking system as a whole is healthy and full of liquidity. The diversified businesses of a Bank of America Corp. (BAC) or JPMorgan Chase cannot be compared to the mismanaged and overly focused nature of Silicon Valley Bank, Silvergate Capital and Signature Bank.
While many mid-sized banks are likely to be unfairly sold in the wake of these highly visible failures, bottom fishing in regional bank stocks should only be practiced by the most loyal and knowledgeable investors. The fallout from last week is only beginning to be felt, and investors are likely to sit on the sidelines until the ongoing crisis of confidence around regional banks subsides.