Editor’s note (March 12): Since the report was published, the Fed and Treasury have said all depositors at SVB will be fully protected.
Itons to take Tidal goes out to find out who’s skinny-dipping – On March 10th a particularly large dipper was caught skinny-dipping. Silicon Valley Bank (SVB), the 16th largest U.S. bank, was taken over by regulators after a failed fundraising and a run on deposits. As officials frantically try to contain the predicament, panicked investors are looking for more nudity.
When a bank fails, there are often concerns about other financial institutions that may end up being exposed because of their links to the failed institution, because they have a similar business model or simply because investor sentiment is low. In a panic, even small, solid banks could lose depositors to larger, more regulated rivals. SVBThe failure to raise capital or sell itself to a larger institution has sent shares of regional banks tumbling, losing nearly a fifth of their value last week. Shares of First Republic Bank, another San Francisco-based bank, are down 34% over the same period.
By the end of 2022, its assets will exceed 200 billion US dollars, SVB Nowhere near institutions like Bank of America or Morgan Stanley, which are known as global systemically important banks, hold trillions of dollars worth of assets. SVB Also has one of the highest percentages of corporate deposits among U.S. banks, is more volatile than retail banks, and has a lot of loans and bonds relative to deposits. As a result, the rapid rise in interest rates has hit banks hard. According to Michael Cembalest of JPMorgan Asset Management, SVB The company is in a “world alone” in terms of duration risk (the threat rising interest rates pose to its portfolio).
There were limited signs of broad distress in the U.S. financial system as markets closed on March 10. Credit default swaps on regional lender debt are uncommon or illiquid; those major institutions are subdued. Five-year debt swaps issued by Morgan Stanley rose to 96 basis points last week from 78 basis points, with higher values implying higher costs of insuring against default. But the same instrument hit a recent high of 139 basis points in October and 1,300 basis points at the height of the 2007-09 global financial crisis.
The bank’s corporate depositors found a second avenue to get into trouble. Ninety-three percent of the bank’s deposits are not covered by federal insurance, which applies only to deposits under $250,000. Direct losses will be concentrated on technology companies. SVB Specializing in loans for asset-light and low-income start-ups. Although small compared to the large US banks, SVB Bragged that it worked with nearly half of U.S. venture-backed tech and life sciences companies last year. As long as deposits remain unavailable, emergency payments such as debt repayments and payroll are at risk.
A blow to the sector could mean a period of restlessness and risk-averse behavior by tech companies and investors alike. Streaming hardware company Roku reported in a March 10 regulatory filing that it held $487 million in the bank.nor SVBAs its name suggests, its activities focus on geography. The composition of the company’s international depositor base has not been disclosed, but it has operations in countries including the UK, China, Germany and India. On March 10, the Bank of England tried to put the bank’s UK branch into bankruptcy.
The spillover effect is already evident in the cryptocurrency market.s price usdc, a stablecoin designed to be pegged to the value of the U.S. dollar, fell to a low of $0.88 on March 11. Circle, payment company management usdcConfirms that about $3.3 billion of its $40 billion reserves are deposited SVB. As investors flee usdcthey poured into another dollar-pegged stablecoin, Tether, which rose to $1.03.
The final avenue for trouble has to do with assets held by failed institutions. Selling complex structured products into a suddenly illiquid market could cause prices to plummet, weakening the balance sheets of other financial institutions.this is unlikely to be true SVBThis is the case because more than 60% of the company’s reported assets are in U.S. government bonds or cash — two extremely liquid markets. Still, a recession will focus attention on companies and organizations with similar portfolios. These include some of the very largest financial institutions in Asia. Insurers in Japan and Taiwan hold hundreds of billions of dollars in foreign bonds.
Three options lie ahead SVB: Bailout, sale or liquidation. The politics of a government bailout look difficult, even as a handful of Silicon Valley prominent figures panicked for help. On March 12, U.S. Treasury Secretary Janet Yellen said officials were concerned about savers but would not provide bailouts for investors and owners. Dodd-Frank, the centerpiece of banking regulation enacted after the global financial crisis, prohibits taxpayer-funded bailouts of individual companies.
According to media reports, the regulator started the auction for SVB on the evening of March 11 and is expected to conclude on the evening of March 12, with or without a deal. When the bank started, there were few institutions that could buy it. U.S. regulations prohibit mergers that create entities that own more than 10% of U.S. deposits, ruling out the country’s biggest banks as buyers: Bank of America, JPMorgan and Wells Fargo.But now this limitation is no longer prohibitive SVB is in takeover.Buyers are likely to find acquiring these relationships an attractive prospect SVB Same with everyone in Silicon Valley.
A March 11 statement from hundreds of venture capital firms backing the bank may help.Selling will depend on potential buyer’s comfort level with value SVBasset.Assessing losses in its bond portfolio should be easy, but SVB It did manage to make a lot of loans — worth $74 billion by the end of 2022. SVB Think these are high quality. It holds just $636 million, less than 1%, as a loss reserve. Outsiders may disagree.
In the absence of a bailout or sale, the liquidation will proceed.The relative fluidity of the SVBassets, meaning savers may soon get back a percentage of their uninsured funds, even if their total losses remain unknown.Depending on how the card is dropped, the consequences SVBits clients and counterparties will be a big test of the U.S. regulatory system — perhaps the biggest since the global financial crisis. ■
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