Bas' Take on Tech: Silicon Valley Bank Collapse
Silicon Valley Bank Collapse – How did it happen, what will follow? – In plain English
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thanks for reading my tech newsletter!
This issue is special as it covers the biggest news of last week in tech: The collapse of the Silicon Valley Bank.
🌉 Silicon Valley Bank Collapse
The Silicon Valley Bank (SVB) collapsed. SVB is the 16th largest bank in the United States. It was shut down and seized by the FDIC on Friday. SVB was founded in 1983, and it was the financial backbone that made Silicon Valley the most important tech hub in the world. It survived the dot-com bubble and the financial crisis of 2008. Now, it’s history.
It is the second-biggest bank collapse in US history.
What happened?
During the tech boom of the last ten years, SVB was the go-to bank for tech startups. It accumulated $200,000,000,000 in deposits. During the pandemic, SVB’s deposits tripled.
When you deposit any amount to a bank account, this creates a liability in the bank’s balance sheet. Therefore, the bank must have assets on the other side of the sheet to balance it out. A large share of these assets is in US treasuries.
Now that interest rates went up, the market price of US treasuries went down. While the US government still guarantees the face value of these papers at the maturity date, the value “as of now” on the free market deteriorated. When people realize this mismatch between liabilities and assets, they want to be the first who get their money out – the recipe of a classical bank run. The more people withdraw their money, the more assets need to be sold – with losses.
SVB lost deposits faster than they anticipated and its management saw the problem coming. They announced that they needed to raise capital and this was planned for March 9th. As a result, the stock price of SVB fell dramatically, and this started the bank run. Account holders tried to withdraw $42 billion in one day. The next day, the bank was closed by US regulators.
In such situations, most deposits of regular retail banks should be insured by the FDIC – simply because most accounts would have a balance of $250k or below. However, SVB accounts are mostly held by tech startups with larger deposits – used for paychecks, for example. It is assumed that more than 85% of SVB’s deposits are uninsured.
The Aftermath
On Monday, US President Biden underscored that “the banking system is safe”.
During the weekend, the Fed announced an emergency loan program while changing the accounting rules at the same time. Under the new program, the owner can pledge treasuries at face value before their maturity date. In other words: Changes in interest rates do not affect the “market” value of treasuries as they can be redeemed directly at the Fed.
A bank closed by the FDIC, an instant “emergency program” by the Fed, and the US President trying to uphold the trust of the general public – it’s apparent that the SVB collapse is not a harmless event “in the tech scene”. Rather, the event is an indicator of a current malfunctioning of the free market in general (i.e. SVB’s collapse is just the symptom of a larger economic problem). Additionally, the collapse itself could now unwind a series of cascading events by contagion.
SVB’s situation is kind of unique: They have the highest proportion of uninsured deposits (S&P Global Market Intelligence displays this number as high as 97.3%). At the same time, more than 50% of SVB’s assets are securities (the highest of their peer group), and 47.5% of these assets have more than five years till their maturity date (again, the highest of their peer group). This is a toxic combination. While the structure of SVB’s liquidity problem could be seen in other banks, too in times of rising interest rates, no other bank has put such a big bet on interest rates in their deposit/asset mix.
SVB Management
The earliest asset trading by SVB’s management is reported to be made by Michelle Draper, CMO, who sold 25% of her SVB stocks as early as February 1st. Other unusual management deals followed. Whether the management knew something and did not comply with SEC/Fed transparency legislation is likely to be subject to future investigations.
At the time of the collapse, SIVB 0.00%↑ was still a buy for many Wall St analysts.
Other banks
As a result of increasing volatility, the stocks of several other banks have been halted from trading. These include:
The turbulence of these banks could be because of their ties to SVB, or because they face similar problems with their balance sheets.
HSBC has already acquired SVB’s UK branch – for 1£.
Signature Bank was closed by regulators yesterday.
Paychecks
Even though the majority of SVB’s accounts are above $250k, it seems likely that depositors will get most, if not all of their money back. However, it will create a liquidity problem for them, too, when they need to send out paychecks. Companies like Brex are already trying to create intermediate solutions for this.
Job Market
The uncertainty in the tech industry is already here. Shortage of credit supply and increasing doubts about economic stability will most likely worsen the situation in the job market.
USDC
I’m usually not covering cryptocurrencies in this newsletter. However, in this case, there is this USDC “stablecoin” – which is pegged to the US dollar. However, Circle, the company behind USDC, weakened the peg after revealing that $3.3 billion of the total $40 billion reserves are held in SVB accounts.
This could at least cause its own liquidity crisis in the crypto markets – and untangle a series of events with institutional investors.
In a recent update, however, Circle underscores that USDC will remain redeemable 1 for 1 with the US dollar again.
Inflation
Structurally, the problem with falling asset prices is something that could affect any bank in the future. A countermeasure is the Fed’s aforementioned emergency program. However, the Fed needs to react to the interest rates as well.
If interest rates stay high (i.e. the Fed does not impose a change in light of recent events), we will most likely see a determination of banks’ assets unless the emergency program isn’t extended. While this might not necessarily create another bank run, it will reduce the capability to create further loans (while the demand for them is shrinking at the same time). Overall, this might end up in an economically depressive situation in the worst case.
If, on the other hand, the Fed decide to lower interest rates again significantly, inflation might get out of control. We already have seen significant rises in inflation rates that have been caused by exogenous shocks, such as the war in Ukraine.
The inflation has slowed down to 6% already – leaving enough room for speculation about the next interest rate decision.
📥 Feedback on Mental Health and AI
I got a nice message in reply to a recent issue that covered both, AI, and mental health.
Someone wrote this:
You were asking in your newsletter if we have read recently something that influenced us. Maybe influence is too strong word for this piece but made me think and also remind me of your newsletter
And send me a link to an article in The New Yorker: “Can A.I. Treat Mental Illness?”
Joseph Weizenbaum created an “AI” psychotherapist as early as 1964 – almost 60 years ago.
In some recent pseudo-philosophical discussions with a friend, we came to the conclusion that patterns of human behaviour are creepily predictable. My argument was that there is a reason we still do not have fully autonomous cars, but we can “easily” manipulate people on how to vote. Road closures and weather conditions are far more “chaotic” (i.e. unsystematic) than human behaviour. While my friend agreed that this might be correct for “collectives” of people, I would even claim it to be true on an individual level. Unless you are not involved. It is just anecdotal, but I was often confused by the behaviour of the people most close to me. I was rarely confused by someone’s behaviour when I was the “observer”, i.e. absolutely not involved in a social situation.
Thanks for sharing this piece! It made me think, too!
🚀 What else?
I have changed this newsletter from “occasional” to at least once every two weeks. The new format not only contains curated news and insights from the tech world but also sets the stage for fellow developers.
I will ask people about their journeys in the tech world and also in life. I’m pretty sure there is much to learn from listening to other people’s experiences, and I am excited to share that with you!
Of course, I need your help with this.
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