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  • Writer's pictureRobert Baharian

SVB's Collapse - A Classic Bank Run

This is the biggest and only story in town right now. Here's my take:

SVB was the bank of choice for Silicon Valley's hot start-ups. As the technology bull market turned bubble, SVB grew its deposits and assets at a rapid pace up until 2021. All these deposits had to go somewhere. And somewhere was 10-year US Treasuries yielding about 1.50% pa. Since then, we all know what happened with interest rates - up. Up a lot. Since then, the IPO market has dried up. The M&A market has dried up. Most of these companies, as we know, we're making a lot of money, some if any. These companies were then burning through the deposits at SVB - business operations, payroll, and so on.

SVB essentially had more money going out than it had coming in. They decided to sell a giant batch of bonds at a loss - you know those bods it bought earlier at a 1.50% pa yield, yep, those. To fund the gap, they decided to raise US$2.25 billion of fresh capital. This should have put worries about any insolvency to rest. Alas, it precipitated a bank run. SVB went from a US$44 billion market cap to US$6.28 billion.

SVB was at the epicentre of the innovation/gig economy. It was the bank that allowed the industry to thrive. When money becomes far more expensive and things slow down, it all goes into reverse.

Since then, many regional banks have seen their stock prices collapse. The SPDR S&P Regional Bank ETF is down about 20%.

Since then, US authorities took extraordinary measures to shore up confidence in the financial system. They have also confirmed that there will be no federal bailout for the bank - depositors will have full access to all of their money, and shareholders will not be protected.

For SVB, it's woes are a combination of one of the largest rate hiking cycle in history, one of the steepest inverted yield curves in history, one of one of the biggest bubbles in tech in history bursting, and the runaway growth of private capital, the share price just couldn't find a level at which there was any real buying interest — let alone enough buying interest to support a $2.25 billion share sale. So it just kept going down, deposits kept on flowing out, and eventually, on Friday, Silicon Valley Bank became the largest U.S. bank failure since the global financial crisis.

A few thoughts:

  • Will there be more? Who knows, but there's generally more than one. This storm has not passed.

  • Although SVB was the 16th largest US bank by market capitalisation, is still small in comparison with the top four, which hold more than a trillion each and have much more diversified business models and customer bases. I don't think the big banks are exposed to this risk. This doesn't mean their stock prices won't trade lower.

  • The regulation that was put in place for the US' biggest banks after the financial crisis includes stringent capital requirements, which means they must have a certain amount of reserves for moments of crisis, as well as stipulations about how diversified their businesses must be. But Silicon Valley Bank and others its size do not have the same regulatory oversight. In 2018, President Donald Trump signed a bill that lessened scrutiny for many regional banks. SVB’s chief executive, Greg Becker, was a strong supporter of the move. Among other things, it changed requirements for the amount of cash that these banks had to keep on their balance sheets to protect against shocks. Bummer.

  • I don't believe this type of collapse can happen in Australia for a few good reasons. Chanticleer wrote an excellent piece on this in the AFR today which covers these. You can read it here.

  • We're going to see further volatility in financial markets as investors battle with higher rates, slowing inflation, stronger job numbers, stronger economy, and collapsing banks. Its the perfect storm. The one missing ingredient here is a US recession. Well, for now anyway.


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