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What does the collapse of Silicon Valley Bank mean for the financial system?

Tontwo ways. Gradually, then suddenly. This is Silicon Valley Bank (SVB), the 16th largest U.S. bank with about $200 billion in assets, went bankrupt. Its financial situation deteriorated over the years.But the San Francisco-based bank announced on March 8 that it was seeking to raise $2.5 billion to plug a hole in its balance sheet, just two days after a statement from the Federal Deposit Insurance Corporation, which oversees deposits at U.S. banks. SVB Failed.

SVBshare price Shares plummeted 60% after the news of the financing was announced. Its chief executive, Greg Becker, urged customers to “support us as we support you”. Some venture capitalists are not persuaded to let portfolio companies run. Hedge fund manager Bill Ackman suggested the government should bail out the bank. By the morning of March 10, its shares were down another roughly 70% in premarket trading before being halted. national broadcasting companyA TV network reported that SVBFundraising efforts have failed and the bank is looking to sell itself to a larger institution. Then came the announcement from the regulator.

These events raise two questions.how is the first SVB into this position. The second is whether its troubles are just an anomaly, or a harbinger of doom for financial institutions.

Start with the first one. SVB It is a start-up bank. It opens accounts for them, usually before the big banks come along. It also offers them loans, which other banks are reluctant to do because few startups have assets as collateral. As Silicon Valley has boomed over the past five years, SVB. Its customers are cash-rich. They need to save more than borrow.

therefore SVBIts deposits more than quadrupled — from $44 billion at the end of 2017 to $189 billion at the end of 2021 — while its loan book only grew from $23 billion to $66 billion. Having a much larger deposit base than the loan book is a problem because banks make money from the spread between the rate they pay on deposits (often zero) and what borrowers pay. SVB Need to acquire other interest-earning assets. The bank had made $128 billion in investments through the end of 2021, most of it in mortgage bonds and U.S. Treasuries.

Then the world changed. As inflation became entrenched, interest rates soared.That killed the venture capital boom and sent bond prices plummeting, leaving SVB unique exposure. Its deposits swell when rates are low and customers are flush with cash. Since banks invest during this period, bonds are bought at the highest price. With venture capital funding drying up, SVBCustomer deposits have decreased: from $189 billion at the end of 2021 to $173 billion at the end of 2022. SVB Forced to sell its entire liquid bond portfolio for less than it paid. It lost about $1.8 billion on those sales, leaving a hole it was trying to fill with financing. When it collapsed, the bank held about $91 billion in investments, valued at cost at the end of last year.

yes SVB’Trouble is abnormal? The bank appears particularly vulnerable to a run. Federal insurance was implemented after a series of panics in the US economy in the 1930s and covers deposits of up to $250,000. This protects all the cash that most people keep in their bank accounts. But it is unlikely to cover funds retained by the company. SVB is a bank that serves not just corporations, but a small group of corporations that are going through tougher times than most. About 93% of deposits are uninsured. Unlike most banks’ customers, its customers have a genuine motivation to run — and they respond to it.

That said, virtually all banks’ bond portfolios faced unrealized losses.if SVB If the bank is most likely in a position where it has to buy bonds at the highest prices, it may not be the only one struggling with the price surge. Treasury Secretary Janet Yellen said she was monitoring several banks in light of events in Silicon Valley. Thankfully, the loan book is a much larger percentage of most other institutions’ assets. As interest rates rise, so do their incomes.

The question now is whether there will be a bailout and, if so, how large it will need to be to leave savers intact. SVB “It’s the lifeblood of the tech ecosystem,” said Congressman Ro Khanna of California’s 17th District, which includes parts of the valley. “They can’t let the bank fail. Whether that means it should be bought by another company … or get help from the Treasury, or even a statement to make depositors feel safe – I’ll leave that to the experts.”

Intervention is not welcome.But if depositors cannot be stiffened, this may be the only option because SVB Clearly not enough assets to cover the loss of assets it was forced to take.Former Treasury Secretary Larry Summers has said there is no reason to worry as long as the state is involved SVB Will damage other parts of the financial system. A lot of people would wish it did, and he’s right.

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