1. There is a reason for everything
1. Riding on the technological boom, the thunder has already appeared
As the 16th largest bank in the United States, SVB's main business is to absorb deposits at a low interest rate of 0.25%. Its clients are concentrated in high-tech start-ups. During the technology investment boom in 2021, its customer deposits surged from US$102 billion to US$189 billion. The single deposit structure also poses huge risks.
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2. Wrong leverage decision, self-destruction of liquidity
SVB took advantage of the dividends of technology stocks to absorb a large number of deposits from Internet companies. In order to increase the bank's revenue level, it accumulated 80 billion fixed-income financial products, with an average interest rate of 1.63%, mostly securitized mortgage loans (MBS) with a term of more than ten years. This strategy is equivalent to locking half of its assets in investments for the next ten years, which in disguise "locks" its liquidity on which the bank depends for survival; wrong leverage decisions and misjudgment of the Fed's rate hike rhythm are also the main reasons for SVB's predicament.
3. The Fed’s interest rate hike and the shrinking of macro liquidity
Since last year, the Federal Reserve has rapidly raised interest rates, causing the largest decline in U.S. Treasury bonds in 50 years. The yield on 6-month Treasury bills has risen to 5.34%, the highest level since January 2001. A year ago, the yield was 0.72%, and two years ago it was 0.06%. Treasury bond prices and interest rates are inversely related. The increase in global macro funding costs has opened the curtain on "banking deleveraging."
4. The triple blow of bond impairment, deposit loss and market value shrinkage
Although the MBS held by SVB can be exchanged for principal and income after maturity, the banking industry pays more attention to timely liquidity. The value of long-term MBS has shrunk after the Fed's tight interest rate hikes, resulting in a floating loss of US$15 billion, accounting for 7% of total assets. Therefore, SVB may not be able to repay depositors enough principal and interest. In order to avoid a liquidity crisis caused by a run, it sold MBS at a discount, turning part of the floating loss into a real loss. The market further panicked, and the equity financing plan was also seen by the market as a "real thunderbolt". The panic sentiment exacerbated the plunge in SVB's stock price, which ultimately resulted in a "triple kill situation" of bond impairment + deposit loss + market value shrinkage.
2. Potential Impact
1. Dominoes
Silicon Valley Bank may be the first domino to cause a crisis. Other US banks may have to follow SVB's example and sell securities at a loss to cope with withdrawals. The market is most worried that the bursting of the technology bubble may be transmitted to the US financial system, thus repeating the bursting of the Internet bubble and even the financial crisis at the beginning of this century.
2. Could encryption also be affected?
There are also many institutions in the crypto space that withdraw deposits through SVB. Coinbase's earliest bank account was SVB.#BitMEXfounder Arthur Hayes tweeted, "Powell may have punctured the US banking system crisis. In 2008, it was the bank's bad credit portfolio, that is, the subprime mortgage crisis. In 2023, is it the bank's long-term bond portfolio, such as UST and MBS?
