What happened to the SVB, and why it happened? What can we expect now?

Why did it happen?

The roots of SVB’s collapse originate from dislocations spurred by higher interest rates. As startup clients withdrew deposits to keep their companies afloat in a chilly environment for IPOs and private fundraising, SVB found itself short on capital. Moreover, as interest rates rose, SVB’s loan portfolio became less and less profitable and riskier. Many of its loans were based on future revenues or valuations of startups that were not yet profitable or even generating cash flow. Some of these loans defaulted or became impaired as startups struggled to survive or went bankrupt. Besides that, their T-bill and government bonds portfolio suffered from the drop we saw during 2022.

What are the consequences?

On March 10, 2023, the DFPI closed SVB and named the Federal Deposit Insurance Corporation (FDIC) as the receiver. The FDIC announced that it would protect insured deposits up to $250000 per account holder at SVB. However, many depositors had balances exceeding that limit or had uninsured products such as certificates of deposit (CDs), money market accounts (MMAs), or sweep accounts.

The collapse of SVB had significant repercussions for the tech sector and the broader economy, especially we saw its effect on the regional US banks. Many startups lost access to their funds or faced difficulties in obtaining new financing from other sources. Some venture capitalists and private equity firms also suffered losses or liquidity problems due to their exposure to SVB’s loans or deposits. The tech sector experienced a slowdown in innovation and growth as funding dried up and confidence eroded. The stock market also reacted negatively to the news of SVB’s failure as investors feared contagion effects on other banks or sectors.

Questions, conclusions, and lessons…

Some analysts have drawn parallels between SVB’s failure and the 2008 banking crisis that triggered a global recession. Others have warned that more bank failures could follow as interest rates continue to rise. However, price stability is a more critical issue for the FED, and they should do whatever it takes to bring down inflation as Chairman Powell stated. The economy definitely needs to cool down if we do not want to have hyperinflation like what various countries like Turkey have right now.

The failure of SVB also raised questions about the role of niche banks that cater to specific industries or segments. Some analysts argue that these banks provide valuable services and expertise that traditional banks cannot offer. Others contended that these banks pose systemic risks due to their concentration risk, lack of diversification, reliance on volatile funding sources, and vulnerability to external shocks, despite being highly regulated. The debate over how to balance innovation with stability continues as policymakers seek to prevent another bank failure like SVB’s.

What do we expect now?

With the guidance of the FED’s latest research on the dangerous side effects of lax monetary policy and the Austrian business cycle theory, we believe the ZIRP quite rigged the banking system by encouraging banks to be less careful. 

Despite the hawkish-like speech Chairman Powell gave last week, we expect that after this banking crisis, the FED might slow its pace for quantitative tightening, if not a policy pivot. Furthermore, it is the investor sentiment as well; US2YRs went down from 5% to around 4.2% right now in anticipation of a policy pivot.

We have the CPI and the PPI data this week, and we will see what will happen after those data come out.

Until then, stay tuned.

DISCLAIMER: THIS TEXT CONTAINS NO INVESTMENT ADVICE.