The US is experiencing the worst banking shock since the 2008 global financial crisis. Silicon Valley’s leading tech startup bank – Silicon Valley Bank (SVB) – has gone bankrupt and the industry’s largest creditor of crypto – Silvergrate Bank – will be liquidated. The disappearance of the banks was the result of the most restrictive US monetary policy in 40 years. If this situation poses a threat to the stability of the entire financial system – including RTVI.
What killed the startup lender and what does COVID-19 have to do with it?
The beginning of the end for California-based bank SVB was the public announcement of a $1.8 billion loss on March 9. After this message, some bank customers immediately decided to empty their accounts as a precaution. The raid of depositors led to the fact that SVB ended up with a negative balance of 1 billion dollars. As a result, the capitalization of the bank collapsed by 63%. SVB was “home” for the money of half of all American companies with venture capital investments. He has worked in the United States, Canada, United Kingdom, Europe, Asia and the Middle East.
SVB’s collapse coincided with the announcement of the voluntary liquidation of Silvergate, another California bank. It was one of the largest cryptocurrency banks in the United States, cooperating with Binance US and Coinbase crypto exchanges. The bank’s management explained the decision to liquidate “the latest changes in the industry and its regulation”, but Custodia CEO Kathleen Long complaints that the cause was Silvergate’s cash gap between deposits and cash.
The liquidation of Silvergate, followed by the collapse of SVB, contributed to the biggest sale in bank stocks – they had their worst day in two years. The KBW Bank Index (which takes into account the performance of 24 US banks) fell 7% – the biggest drop since June 2020.
Since 2020, the US economy has been “flooded with money”, HSE Professor Ivan Rodionov said in an interview with RTVI. During the COVID-19 pandemic, the U.S. government gave about $4 trillion in “helicopter money” as anti-crisis aid. And American companies raised a record amount of venture capital in 2020-21.
This caused the rise and fall of Silicon Valley Bank (SVB). The boom allowed the bank to grow rapidly, attracting deposits from startups. The volume of bank deposits double only in the last 12 months. SVB invested in long-term bonds under the illusion that US Federal Reserve (Fed) rates would be stable.
“SVB had problems due to the decline in the value of the bonds it held, and the value of the bonds fell due to the increase in Fed rates,” explained equity market analyst Igor Gerasimov. international at BCS Mir Investments, at RTVI. .
Jeff Chiu/AP
Financial injections into the pandemic have overheated the US economy and caused inflation to hit a 40-year high. To suppress price increases, the Fed has raised rates eight times since March 2022. Banks were loaded with low-interest bonds. Economists have long feared that a rate hike could at some point lead to defaults. As a result, SVB went bankrupt first.
“Silicon Valley creative bankers decided that banking was about taking 0% deposits, moving 60% of assets into bonds (mostly 3% mortgages), stacking them to maturity ( no pressure on capital) and voila… the profit, – ironic Egor Susin, General Director of Gazprombank Private Banking. “Rates rose, the IT sector, bathed in free money, deflated, bonds crashed, and with them the SVB.”
The SVB is now taken over by the FDIC, the American “deposit insurance agency”. End of 2022 in SVB were not 89% of deposits are insured – about 175 billion dollars.
“We haven’t managed to withdraw a penny. There are thousands like us. The whole industry is in shock,” wrote Andrey Doronichev, former Google product manager and founder of startup NFT Optic, on Instagram*.
SVB CEO Greg Becker sold $3.5 million worth of bank stock two weeks before the bankruptcy. complaints Newsweek. According to him, the bank’s problems had been known to financial circles for several weeks.
Will 2008 repeat itself?
Aggressive rate hikes inevitably lead to losses in the financial system, States Yegor Susin: “The only question is who has enough capital to absorb this loss, and who will be swept away, and whether this will cause systemic risks.” “It is possible that a similar fate will befall banks that have carried out the same risky operations as SVB”, admits Ivan Rodionov.
Jeff Chiu/AP
Historically, with each rate hike cycle in the US economy, something “broke”, recalled Igor Gerasimov: “At least the stock market fell and business activity slowed down, and at maximum, financial crises set in, which then covered the whole world.”
Rising rates are painful The next Fed meeting will be March 21-22. The head of the regulator, Jerome Powell, announced a possible acceleration of the pace of the rise in the key rate. The decision largely depends on the situation on the labor market. Last week, the number of Americans applying for unemployment benefits for the first time jumped 11%. Recently Microsoft, Meta*, Google, Amazon and other big tech companies have been laying off employees en masse, General Motors recently announced similar plans.
While the market assesses the probability of “infection” of large banks by this risk as low, Igor Gerasimov points out: “The situation is potentially negative for other medium-sized regional banks. Potential problems may be with First Republic Bank, Signature Bank, Charles Schwab Among the major international banks, Credit Suisse has recently been in trouble.” US Treasury Secretary Jeannette Yellen assured that the banking system is stable.
“Bubble Burst”
SVB has been one of the driving forces behind the development of the venture capital market in the United States, many startups and venture capital funds have been served there. “The bank was a backbone for the venture capital industry, and the current situation, when the bank has literally disappeared in a week, is definitely a signal for us of a certain transformation of the industry”, Nina Feodosiadi , head of the HSE Business Incubator, explained to RTVI.
The collapse of SVB bank exposed systemic problems in the startup market, Feodosiadi points out. According to her, IT and crypto startups are seriously overvalued, and the nominal amount of money that was sitting in corporate bank accounts made the current situation technically possible.
Annie Spratt/AP
“At the heart of the business model is the startup’s promise of future growth based on technology, idea, team and fair faith in the future market. They claim they are worth a lot of money, although many do not yet generate income and promise to earn in the future.Investors invest in them – give them money for salaries, equipment, research, product release, marketing.Investors themselves earn by reselling the startup to the next investors in the chain, who think: “Now I will buy a startup conditionally for $100, it will grow in a year, and I will already sell it for $1000”. of faith in a better future,” explained Nina Feodosiadi.
“We, being at the very beginning of this chain, see that this model is seriously overheated, and the signal that we have received in the current situation is the need to seek new development models for the technology company market,” explains the director. HSE expert. Of course.
The collapse of the SVB is a signal that the venture capital market must recover. “For some reason the state did not save the bank. Although in any country a backbone lending institution will not be allowed to go bankrupt. It looks like a deliberate act of popping a soap bubble,” says Nina Feodosiadi.
In the future, less money will come to the venture capital market and it will be harder for startups to attract funding, Rodionov believes.
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