The bankruptcy of Silicon Valley Bank, or SVB, which specializes in financing large companies in the new technology sector, follows a rout caused, in part, by the tightening of U.S. monetary policies.
The SVB has been unknown to the general public until now. True, it was “only” the 16th largest U.S. bank ($209 billion in assets) at the end of last year. But Silicon Valley Bank, which has just failed, has become the largest bank to do so since the 2008 financial crisis. What interests us is its rather strong ties to the tech world, which has left investors, companies and stock exchanges around the world in doubt. And yet, there are several reasons for this sudden decline.
Nearly $200 billion in uncovered deposits: much of it from tech startups
The tech world is quite familiar with Silicon Valley Bank. Game publisher Roblox has invested 5% of its cash there, while Roku, the company that makes video streaming boxes, has invested nearly $500 million (a quarter of its financial windfall). Money that is now potentially lost, since the funds deposited by many Silicon Valley start-ups were simply not covered by a guarantee. We’ll talk about this detail at the end of the article.
Background
In one week, three U.S. banks have failed. In addition to SVB, we learned that Silvergate Bank (closely related to the world of cryptocurrencies) and Signature Bank (until then 21st largest US bank) also went under. If Western banks are suffering this Monday on the stock market, the consequences should however only be temporary and limited for the banking sector.
The tech sector, on the other hand, has been suffering for several months, not being able to raise as much money as it did a few years ago. The Federal Reserve (Fed) has raised its rates, with a monetary tightening that has put pressure on banks, seeing their margins decrease. The Fed, which is trying to fight inflation, has thus pushed the customers of these banks to invest their cash in better paying financial products. The three banks that had just failed could not digest the massive withdrawals of savers (in other words, they did not have the means to respond to the numerous requests for withdrawals), who needed money to pay the salaries of their employees. Of course, it is not impossible that other banks will go bankrupt. But this is not the dominant concern.
The banking sector is well equipped to deal with these sudden events. But for the technology sector, it’s a different story. Half of SVB’s client portfolio was made up of companies in the new technology and science sector, whose financial health depends on the investments they receive. Each company should be able to recover $250,000, the maximum amount guaranteed by the Federal Deposit Insurance Corporation, which protects bank deposits in the United States, at that level only. It is important to realize that 96% of the deposits made with SVB were not covered. We are talking about 173 billion dollars.
SVB: a series of errors in the space of a few days
For Deepak Shenoy, founder of the financial and portfolio management firm Capitalmind, Silicon Valley Bank had a strange approach to short-term investing, regularly betting on high-risk start-ups that offered no real long-term guarantee.
Shenoy also questions the timing of SVB’s announcement Wednesday night to raise capital as soon as possible. Its CEO, Greg Becker, was in urgent need of raising cash, noting the numerous withdrawals of his clients. He then sold $21 billion worth of securities, almost all of which were Treasury bills and bonds purchased when interest rates were hovering around zero. But these securities had lost some of their value after the U.S. central bank decided to raise rates. SVB instantly lost $1.8 billion. For Deepak Shenoy, the timing was inappropriate, as it came on the heels of the collapse of another bank, Silvergate Bank. Above all, the capital increase increased investors’ concern.
Silicon Valley Bank’s third mistake was its failure to communicate. The famous agency Moody’s told the bank that it was going to downgrade its debt rating, leading to a plunge in its share price (-66% on March 9) and ever greater withdrawals. Rather than being transparent about the situation, SVB preferred to encourage its clients not to panic, which logically led to the opposite situation, reinforcing the uncertainty surrounding the bank, whose signals had all been negative for several days.
The historic decision of the American authorities, at the bedside of individuals and companies affected by the SVB bankruptcy
On Sunday, Joe Biden said that those responsible for the failure of the three U.S. banks would have to be “held accountable,” calling it a “mess. But while the U.S. president is scheduled to speak Monday to reassure the banking industry and citizens about how Washington will maintain a strong and resilient banking system, a historic announcement has already been made by the authorities.
The Treasury, the Fed and the Deposit Insurance Corporation (the FDIC, mentioned above) have already announced that they will allow customers affected by the Silicon Valley Bank bankruptcy to recover their full deposits. A historic measure approved by the White House, to try to limit the damage.
Also read Silicon Valley Bank: how the American start-up bank was sunk