Australian (ASX) Stock Market Forum

The collapse of Silicon Valley Bank

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farmerge said:
Will it be a case of bang, bust and harboom coming. Have the boffins got their eyeballs on the gane or just to busy playing golf etc.
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well dozens of startups relied on SVB for payrolls , bill-paying and other normal banking services ( imagine if BEN or BOQ closed down next Tuesday to give you an idea )

it could get messy , and messy all around the Western world , several EU are rather fragile ( even after being bailed out during the PIGS debacle )
 
The problem:

Screen Shot 2023-03-12 at 8.00.31 AM.png

So the 1 month yield is 4.73%.

That is a higher yield than you can receive from a bank demand or time deposit. So, you take your cash (deposit) out of the bank and buy a 1 month Treasury.

The bank now has an issue: as deposits flee the banking system into UST, liquidity issues arise. What can the banks do? Well they can sell some of their (to date not marked-to-market) bond portfolio. Ooops. When they sell they sell at a loss. A massive loss. There goes the bank.

The US government, Treasury, is so cash constrained that it is crowding out the banking system. This is a major problem that is not going away anytime soon.

jog on

duc
 
Knobby22 said:
Are you saying that these zombie companies will need more but find it harder to get people with brains?
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No. The companies that need money because their outgoings are higher than money coming in won't have access to new capital. They'll close.

I think the problem is that people with brains don't have much sense; in the race to the top, they've forgotten their parachutes. And if contagion can't be contained, there will be a lot of hard landings. THUD. THUD
 
It's interesting the (smug) b*stards call their imagined start-up and IPO world an ecosystem. We're about to find out how it operates, and whether it collapses.

Moral hazard is back!!
 
So I wonder how many other banks are holding bonds that were bought during the boom times?

If rates continue to be ramped (which is questionable if they can after this bank collapsed and fed would be copping heat) it may cause a bigger bank run. Any info on which banks maybe at risk?
 
Dona Ferentes said:
No. The companies that need money because their outgoings are higher than money coming in won't have access to new capital. They'll close.

I think the problem is that people with brains don't have much sense; in the race to the top, they've forgotten their parachutes. And if contagion can't be contained, there will be a lot of hard landings. THUD. THUD
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As the saying goes It is not the drop/fall that is going to hurt it is the sudden stop on terra firma.
 
There will be an enormous amount of pain in the public unlisted sector as well as the private venture backed companies that have taken venture capital, gone with the investor guidance to use SVB. These portfolio companies will then have not only deposited raised capital with SVB but also then taken on debt to goose growth initiatives. In these cases, SVB routinely made sure the client companies exclusively banked with SVB. May of these companies will be struggling to make payroll this week.

If the savings are not just locked up but actually gone; then how many are actually trading insolvent?
 
Dona Ferentes said:
Is there a more appropriate thread, to deal with the collapse of Silicon Valley Bank ? SVB is the second largest collapse, at > $200 billion in deposits, with only Washington Mutual in 2008 being bigger.

While there is deposit insurance, the nature of SVB being a start up and VC lender to the tech sector, means that only a small amount of deposits are covered. A key part of the tech ecosystem (ha ha), Tech used SVB to make payroll and meet running costs, it seems, so the ripple effect is going to be very interesting.

Australian venture capital companies whose portfolios of companies held accounts with SVB, include Blackbird, King River, Main Sequence, Square Peg and Airtree. Only 2.7 per cent of the bank’s overall customers held deposits of less than the guaranteed $US250,000.

Many of the bank’s venture capital customers have been failing to raise their own new funding, which has also led to a depletion of SVB’s deposit base, forcing the bank to liquidate $US21 billion in safe assets, such as low yielding US Treasuries, at a loss.

(a loss of $2 Bill, it is reported. And the recapitalisation failed)
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I posted this in another thread -

The question now is whether there will be a bail-out and, if so, how big it would need to be to make depositors whole. svb “is the lifeblood of the tech ecosystem,” ... “They can’t let the bank fail. Whether that means that it should be acquired by another company…or get assistance from or even a statement from the Treasury department so that the depositors feel secure...”​
​
Intervention would be unpopular. But short of stiffing depositors it may be the only option, since svb clearly did not hold enough to cover the losses it was being forced to take on assets. Larry Summers, a former treasury secretary, has said that so long as the state steps in, there is no reason to worry that svb will harm other parts of the financial system...​

What does Silicon Valley Bank’s collapse mean for the financial system?​

Two ways. Gradually, then suddenly. That is how Silicon Valley Bank (svb), the 16th-largest lender in America, with about $200bn in assets, went bust. Its financial position deteriorated over several years. But just two days elapsed between the San Francisco-based bank’s announcement on March 8th that it was seeking to raise $2.5bn to plug a hole in its balance-sheet, and the declaration by the Federal Deposit Insurance Corporation, which regulates American bank deposits, that svb had failed.

20230318_EPC307.png

SVB's share price plunged by 60% after the capital raise was revealed. Greg Becker, its chief executive, urged clients to “support us as we have supported you”. Unpersuaded, some venture capitalists told portfolio companies to run. Bill Ackman, a hedge-fund manager, suggested that the government should bail out the bank. By the morning of March 10th its shares had slid another 70% or so in pre-market trading, before a halt was called. cnbc, a television network, reported that svb’s capital-raising efforts had failed and that the bank was seeking to sell itself to a larger institution. Then came the announcement from the regulators.

These events raise two questions. The first is how svb got into this position. The second is whether its troubles are simply an anomaly, or a harbinger of doom for financial institutions writ large.

Start with the first. svb is a bank for startups. It opened accounts for them, often before larger lenders would bother. It also lent to them, which other banks are reluctant to do because few startups have assets for collateral. As Silicon Valley boomed over the past five years, so did SVB. Its clients were flush with cash. They needed to store money more than to borrow.

Thus svb’s deposits more than quadrupled—from $44bn at the end of 2017 to $189bn at the end of 2021—while its loan book grew only from $23bn to $66bn. Since banks make money on the spread between the interest rate they pay on deposits (often nothing) and the rate they are paid by borrowers, having a far larger deposit base than loan book is a problem. svb needed to acquire other interest-bearing assets. By the end of 2021, the bank had made $128bn of investments, mostly into mortgage bonds and Treasuries.

Then the world changed. Interest rates soared as inflation became entrenched. This killed off the bonanza in venture capital and caused bond prices to plummet, leaving svb uniquely exposed. Its deposits had swollen when interest rates were low and its clients were flush with cash. Since the bank made investments during this time, it purchased bonds at their peak price. As venture-capital fundraising dried up, svb’s clients ran down their deposits: they fell from $189bn at the end of 2021 to $173bn at the end of 2022. svb was forced to sell off its entire liquid bond portfolio at lower prices than it paid. The losses it took on these sales, some $1.8bn, left a hole it tried to plug with the capital raise. When it went under the bank held some $91bn of investments, valued at their cost at the end of last year.

Were svb’s troubles an anomaly? The bank appears to have been uniquely susceptible to a run. Federal insurance, put in place after a series of panics that felled the American economy in the 1930s, covers deposits up to $250,000. This protects all the cash that most individuals would stash in a bank account. But it is unlikely to cover the funds a company would keep. svb is a bank not just for companies, but a narrow subsection of them that have suffered tougher times than most. Some 93% of its deposits were uninsured. Its customers, unlike those at most banks, had a real incentive to run—and they responded to it.

That said, nearly all banks are sitting on unrealised losses in their bond portfolios. If svb is the bank most likely to have been put in the position of having to stock up on bonds at their peak price, it is probably not the only one struggling with the whiplash in prices. Janet Yellen, the treasury secretary, says she is monitoring several banks in light of the events in Silicon Valley. Thankfully, loan books make up a much larger share of assets at most other institutions. And with rates rising, they are earning more.

The question now is whether there will be a bail-out and, if so, how big it would need to be to make depositors whole. svb “is the lifeblood of the tech ecosystem,” notes Ro Khanna, a congressman from California’s 17th district, which includes some of the valley. “They can’t let the bank fail. Whether that means that it should be acquired by another company…or get assistance from or even a statement from the Treasury department so that the depositors feel secure—I will leave that to the experts.”

Intervention would be unpopular. But short of stiffing depositors it may be the only option, since svb clearly did not hold enough to cover the losses it was being forced to take on assets. Larry Summers, a former treasury secretary, has said that so long as the state steps in, there is no reason to worry that svb will harm other parts of the financial system. Lots of people will be hoping that it does, and that he is right.
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Central banks, especially the Fed, once they start hiking rates they keep going until something breaks.

What will break pretty much nobody will correctly foresee the detail but it’s a given something blows up.

Something just broke. Whether it’s big enough remains to be seen.....
 
Smurf1976 said:
Central banks, especially the Fed, once they start hiking rates they keep going until something breaks.

What will break pretty much nobody will correctly foresee the detail but it’s a given something blows up.

Something just broke. Whether it’s big enough remains to be seen.....
Click to expand...

That’s what I’m afraid of. And the stooges in charge are the same ones that told us ‘rates won’t rise until 2024’
 
www.lse.co.uk

UK's high street banks given 24 hours to rescue SVB UK - Sky News | Financial News

UK's high street banks given 24 hours to rescue SVB UK - Sky News | Financial News
www.lse.co.uk www.lse.co.uk
Sun, 12th Mar 2023 10:51 GMT - NSW 21:51 AEST
Lenders including Barclays PLC and Lloyds Banking Group are among the parties to have been approached by the board of SVB UK over the weekend to see if an emergency takeover deal can be reached, the report said...

www.lse.co.uk

UK PM and chancellor to meet BoE over Silicon Valley Bank collapse | Financial News

UK PM and chancellor to meet BoE over Silicon Valley Bank collapse | Financial News
www.lse.co.uk www.lse.co.uk
Sun, 12th Mar 2023 08:11 GMT - 17:11 AEST
 
Last edited:
moXJO said:
So I wonder how many other banks are holding bonds that were bought during the boom times?

If rates continue to be ramped (which is questionable if they can after this bank collapsed and fed would be copping heat) it may cause a bigger bank run. Any info on which banks maybe at risk?
Click to expand...


Lots:

Screen Shot 2023-03-13 at 7.17.32 AM.png

jog on
duc
 

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