Thursday, March 9, 10:50 a.m. The employee of the California techno firm is at the dentist when he hears the news. Seized, he stops the treatment and rushes home to empty his Silicon Valley Bank (SVB) account. And to hell with cavities.
It was his boss, the entrepreneur Alexander Torrenegra, who informed him of the difficulties of the SVB by telephone. The news spread like wildfire and thousands of depositors imitated Mr. Torrenegra, leading to the collapse of the banking institution. Requests for withdrawals of many billions of dollars have been facilitated by rapid access to bank accounts on the internet.
Alexander Torrenegra recounts in detail his steps on his Twitter feed, like those of many others. Between 10 a.m. and 1 p.m., the businessman quickly launches transfer operations to other banks for his personal accounts, but especially for his two techno business accounts, which are much fuller.
On Friday he had only managed to withdraw part of it, but on Sunday the US authorities announced that they were guaranteeing all depositors’ funds after the closure of the SVB.1. Phew!
This anecdote is eloquent with regard to a central element of the success of banks: the confidence of depositors. Despite their accounting sophistication, sophisticated risk policy and overpaid managers, banks can be rocked when that confidence evaporates.
All the same, the SVB had reason to see this confidence shaken. Management decisions over the past two years have melted its assets and reduced its capital.
SVB’s liabilities consisted mainly of deposits made by tech entrepreneurs from fundraising with venture capitalists. On average, deposits were some US$4.5 million, well above the US$250,000 guaranteed by the Federal Deposit Insurance Corporation, the US equivalent of the Canada Deposit Insurance Corporation (CDIC).
Over time, the SVB placed depositors’ funds in risky and less risky assets, such as US Treasuries and mortgage-backed securities. But in 2021, in the face of low pandemic interest rates, management took longer-term positions to get better returns.
The catch is that the rise in interest rates in 2022 has melted the value of this bond portfolio, compounded by the drop in customer deposits caused by the post-pandemic decline in corporate values. tech.
The bank was thus forced to liquidate securities at a loss to reimburse the withdrawals, which created a capital hole.
To bail out, the SVB launched an issue of shares, with the announcement of the arrival, Wednesday evening, of a major investor. By Thursday morning, however, the deal had gone wrong. And in the meantime, this call for capital has raised concerns among depositors about the financial health of the company, causing the crush2.
That said, some experts do not believe that the bankruptcy of the SVB will lead the financial system into a crisis, as in 2008.
First, the SVB and its 209 billion US in assets is considerably smaller than the bank Lehman Brothers in 2008, the bank whose failure triggered the crisis. Lehman’s assets were $639 billion at the time, when the economy was half the size.
Second, the SVB specializes in a specific sector, that of small tech companies and venture capital. Third, the authorities reacted very quickly, in the United States as elsewhere.
The SVB was closed on Friday by the Federal Reserve – the US central bank – even before the stock markets closed. And on Sunday, US authorities announced that all depositors would get their money back, even if the amount exceeds US$250,000.
The Federal Reserve has also agreed to lend the necessary funds to other banks that need them in the event of withdrawals from their customers, as well as to allow access to the deposits of another bank in difficulty, namely the Signature Bank.
In parallel, the United Kingdom announced the acquisition of the British branch of the SVB by HSBC, thus ensuring the continuity of activities.
“I don’t expect a crisis like 2008, not at all,” explains the former CEO of the Caisse de depot et placement Henri-Paul Rousseau, now an associate professor at HEC Montreal.
Another reason limits the chain reaction, believes the economist: the SVB has a charter from the State of California and not a federal charter. However, federally chartered banks are still subject to frequent stress tests of their capital since 2008, which makes them financially sound. It appears that these tests were abandoned under the Trump administration in 2018 for banks like SVB.
The event will still cause a painful questioning in the United States. First, the bill will have to be passed on either to taxpayers or to other institutions, through their premiums paid to the Federal Deposit Insurance Corporation.
Second, there is a risk of a shift of funds from investors and depositors to higher quality banks. Finally, Americans will have to wonder about the less demanding regulation of state banks.
“It’s a slap in the face of the US federal authorities, after the regulatory efforts of 2008,” said Henri-Paul Rousseau.
In 2008, the bankruptcy of Lehman Brothers had been preceded by the collapse of Bear Stearns, six months earlier. Let’s hope that the current economic context, marked by a rapid rise in interest rates, does not reserve any other bad banking surprises in the United States in a few months.