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Bankruptcy of Silicon Valley Bank | The shelled discomfiture



For those who dropped out last weekend, here is a recap of the last few days regarding the collapse of Silicon Valley Bank (SVB), now under the control of the American deposit insurance company, the FDIC (Federal Deposit Insurance Corporation).

What is SVB?

It is a regional bank located in Santa Clara, California, with $209 billion in assets and specializing in technology start-ups and venture capital firms.

What happened ?

The institution faced a liquidity crisis, caused by a banking panic. Depositors demanded their money in droves, which the bank had invested in long-term US government bonds.

These bonds have lost value due to rising interest rates (the value of bonds moving in the opposite direction to interest rates). By selling the bonds for cash, the institution crystallized the loss in value on these securities.

A rare phenomenon in Canada, a bank panic nevertheless occurred in 2017 at Home Capital Group following revelations of possible embezzlement, recalls Pierre-Olivier Langevin, portfolio manager at Medici.

What was the triggering event?

“On March 8, 2023, writes the rating firm DBRS Morningstar, the SVB published its quarterly results, indicating that it had sold 21 billion in securities for a loss of 1.8 billion (after tax) and that it was trying to raise additional capital. A run on the banks ensued, and on Thursday, March 9, $42 billion in deposits were withdrawn from the bank, or about 25% of total deposits, and the pressure from the ensuing shortage of liquidity resulted in bank failure. »

What is special about the SVB?

This institution has the distinction of having a concentration of clients from the techno, life sciences and venture capital sectors, sectors which were running at full speed during the pandemic and which made imposing deposits at the SVB. With rising interest rates, financing is more expensive, and sources of funds are becoming scarcer. SVB customers may need their money. However, 95% of the deposits were not insured by the FDIC because they exceeded the limit of US$250,000.

“A Canadian bank has a much more diversified customer base. In the United States, the business model can be more specialized,” points out Gabriel Dechaine, analyst at National Bank Financial.

What mistakes did the SVB make?

It has a concentration of customers from techno. Deposits come from a limited number of customers with considerable means. It also failed to hedge against interest rate risk. “Interest rates were really low in 2021. It was problematic to place the money in long maturities”, condemns Pierre-Olivier Langevin. Long-term securities react strongly to a change in interest rates.

How did the American authorities react?

Last weekend, the Federal Reserve, FDIC and Treasury responded collectively by ensuring the repayment of all deposits from troubled banks. The Fed has also set up a credit facility available to financial institutions, which could in turn experience a liquidity crisis if their depositors were to claim their money in large numbers.

What was President Biden’s message Monday morning?

The president wanted to reassure Americans by telling them that their bank deposits were safe. They will be insured at no cost to taxpayers. It is the fees charged by the FDIC to financial institutions that will foot the bill. He specified that the institutions in difficulty will not be saved by the government, contrary to the crisis of 2008. Their leaders have also lost their jobs. Shareholders and holders of debt securities of these institutions should therefore expect to lose their investment. He also promised to strengthen banking regulations.

What are the risks of contagion?

On Sunday, the FDIC took control of the Signature Bank of New York (assets of approximately 110 billion US). Last September, a quarter of these deposits came from the cryptocurrency sector, reports Reuters.

On Monday, regional banks like First Republic (US$212 billion in assets), of San Francisco, were under pressure. First Republic has in common with the SVB to have a large percentage of uninsured deposits.

But for Mr. Langevin, the worst is probably over. “From a factual point of view, the crisis is possibly resolved. Regulators have taken the necessary steps. The banks have all the necessary tools to have the liquidity in the event of an exodus of deposits,” he believes.

DBRS doesn’t see a stake for large US banks either. “In our view, US bank balance sheets remain strong, with ample levels of liquidity and deposits that are not prima facie likely to be withdrawn quickly. »

What are the impacts of these events on the economy?

They are potentially considerable. According to Goldman Sachs, the Federal Reserve will take a break from tightening its monetary policy. Last week, the market was rather expecting an increase in interest rates. US inflation figures will be released on Tuesday.

For Mathieu Marchand, independent economist from Quebec, the events of the last few days demonstrate the US economy’s dependence on low interest rates.

“This is the first bubble in a pot of boiling water. If interest rates remain at their current level for a long time, the adjustment in asset prices will be downwards and we will witness a crisis in asset values. »

“Since Friday, he continues, the soft landing scenario is dead. When a bank explodes, there is no question of a soft landing. »

The events of the last few days could also mark the start of a recession in the United States and with the recession, the disappearance of inflation, indicates Mr. Marchand.

“I can’t predict the future, but it’s possible that the recent banking setbacks will harm the scenario of a soft landing for the American economy,” agrees Gabriel Dechaine of National Bank Financial.

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