Home ›› 31 Mar 2023 ›› Opinion
The US-based lender Silicon Valley Bank’s (SVB) collapse came as a shock for US banks and global financial institutions. The 40 years old bank which has no stressed loans was suddenly mired in trouble failing to manage liquidity following the fed interest rate hike and ultimately seeing the bank close its doors.
The SVB was the 16th largest Bank in the USA which mainly financed tech-based startups. It has been the largest bank failure in the USA since the financial crisis in 2008. In 2008, many banks in the USA collapsed due to the investment into subprime mortgages. Financial bubbles were created following the rise of real estate prices.
Due to the financial crisis in 2008, many big banks collapsed in the USA and one of them was the Lehman Brothers. Following the fall of SVB, the USA and global financial institutions are hiccupping. Startups and venture companies have been in a mad rush of withdrawing their deposits.
Shortly after the SVB collapse, another bank namely Signature Bank shut down following its involvement in a cryptocurrency-related scandal. Though the financial crisis stemmed from the USA, it was not only confined to the US financial system but also spread across the globe gradually. Recently Credit Suisse, one of the largest Banks in Switzerland, has also faced liquidity problems. Let us see what the reasons behind the failure of the bank.
Ukraine-Russia war and policy interest rate hike
The war between Russia and Ukraine in 2022 came as a big blow to the US financial system. The US Federal Reserve (FED) was forced to raise the policy interest rate highest ever to curb inflation. Due to a hike in interest rates, the prices of previously purchased bonds yield went down and newly purchased bonds yields jumped high for instance, in 2020 SCB portfolio average yield was 1.70 per cent which rose to 3.9 per cent in 2020.
Huge cash mobilization to SVB
During the Covid time back in 2020, the tech and venture startup companies saw hefty cash in their hands as people were using technologies more frequently than before. So tech companies were doing a booming business and they deposited their cash into the SVB. Within a short time, the deposit of the bank jumped from US$76 billion in 2020 to US$ 176 billion in 2022.
Investment of short-term funds in long-term govt bonds
As the stock market was in a shabby state during Covid time, startup companies deposited their cash in SVB. The treasury people invested in long-term securities aiming to avail high-interest rates with the short-term funds. So, there were mismatched maturity buckets which lead to incurring huge losses of selling bonds when withdrawal pressure erupted.
Aversion of taking a risk in volatile market situations
A few reasons prompted the SVB to purchase government treasury bonds. Firstly, Treasury bond is government securities which are treated as highly secured investment. Secondly, Treasury bond yield was height in the market at that time compared with others investment opportunities. Thirdly, the bank was averse to taking risks of lending. So they bought government securities as an alternative.
Rise of inflation and high yield of govt securities
Following the Ukraine-Russia war and interest rate hike in the US, the prices of foods spiralled exorbitantly which pushed up the depositors to withdraw cash from the SVB. Moreover, startups started to invest in government securities as the yield of government bonds was lucrative as the Fed rise the new interest rate of bonds which was the highest ever in US history.
Loss in govt securities and negative news of capital shortfall
To tame the rising inflation following the Ukraine-Russia war, US Fed raise the policy interest rates which spiked interest rates of govt. bonds. Due to mounting inflationary pressure and high borrowing costs, depositors were withdrawing deposits from the SVB.
By the end of 2022 the Deposit of SVB rose to US$ 176 billion from US$66 billion in 2020. When SVB got huge cash as deposits, it used a big chunk of the deposit to purchase long-term government securities. SVB injected a big chunk of depositors’ cash to purchase govt. 10 years bonds as short-term securities yield near zero.
When tech startups rushed to cash due to rising inflation, so they throng to the Bank for cash. The bank failed to pay the high demand for cash as it was suffering from liquidity due to long-term bonds. So SVB opted to sell their low prices previously purchased bonds with a loss of USD 1.80 billion. Meanwhile, in their financial disclosures, they disclosed that with their US$16 billion capital, they had unrealized loss amounting US$15 billion against bonds. Meanwhile, SVB announced that they would inject capital. The news came as a shock to its depositors and they got panicked and went to withdraw deposits. In a single day, SCB saw the highest deposit withdrawal of US$42 from the bank and faced the classical bank run.
Lack of confidence and fear of losing money
As the SVB balance sheet disclosed, the information of SVB unrealized loss of US$ 15 billion came to the fore as it invested almost all of its liquidity to government long-term securities. Knowing the information, depositors rushed to the bank for withdrawing their cash fearing of losing their deposits.
FED and FDIC lack of timely action and support
When the bank is suffering from a liquidity crisis, the regular Fed and FDIC did not any measures. They could have given liquidity support to cash-strapped SVB bank and assured the customer safety of deposits.
Inefficiency in Liquidity management
The Treasury department of the bank is mainly liable for this crisis as they couldn’t manage their cash efficiently. They unwisely invested the short-term fund for long-term govt. bonds. Finally, SVB’s failure should come as a wake-up call for the stakeholders for the stakeholders of Bangladesh’s banking sector.
The writer is a banker
