SVB: from the valley to the chasm

On Friday, Californian bank Silicon Valley Bank (SVB) became the largest bank to fail since the 2008 financial crisis.  In a sudden collapse that shocked financial markets, it left billions of dollars belonging to companies and investors stranded. 

SVB took deposits from and made loans to companies in the heartland of America’s tech sector.  The US Federal Deposit Insurance Corporation (FDIC) is now acting as a receiver. The FDIC is an independent government agency that insures bank deposits and oversees financial institutions, which means it will liquidate the bank’s assets to pay back its customers, including depositors and creditors.

What happened to SVB and is this a one-off or a signal that there are more financial crashes to come?  The immediate development was the announcement by SVB that it had sold at a loss a bunch of securities it had invested in and that it would have to sell $2.25 billion in new shares to try and shore up its balance sheet. That triggered a panic among key tech firms in California which held their cash at SVB.  There was a classic run on the bank.  With lightning speed, the bank had to stop depositors withdrawing cash. The company’s stock price collapsed, dragging other banks down with it. Trading in SVB shares was halted and then SVB abandoned efforts to raise capital or find a buyer, leading to the FDIC taking over control. 

While relatively unknown outside of Silicon Valley, SVB was among the top 20 American commercial banks (the 16th largest), with $209 billion in total assets at the end of last year, according to the FDIC. It’s the largest lender to fail since Washington Mutual collapsed in 2008 during the global financial crash.  So, contrary to some reports, SVB is no minnow. It offered services to nearly half of all venture-backed tech and health care companies in the US.  SVB held money for these ‘venture capitalists’ (those that invest in new ‘start-up’ companies).

But it also made investments with the cash deposits it got, extending sometimes risky loans to tech founders personally as well as to their companies. But its investments started to make losses.  SVB had bet on buying seemingly safe US government bonds.  However, as the Federal Reserve began its cycle of hiking interest rates to “control inflation”, the value of these government bonds fell sharply and SVB’s balance sheet began to take water.  When it informed the financial world that it was selling these bonds at a loss to meet customer withdrawals of cash, the run on the bank flooded through.  On failing to get extra funding by selling shares, SVB had to declare bankruptcy and go into FDIC receivership.

Some are brushing off the idea that SVB’s collapse is a sign of things to come.  “SVB was small, with a very concentrated deposit base”, said Amundi’s head of European equity research, Ciaran Callaghan. It was “not prepared for deposit outflows, didn’t have the liquidity at hand to cover deposit redemptions, and consequently was a forced seller of bonds that drove an equity raising and created the contagion. This is very much an isolated, idiosyncratic case.”

So it’s a one-off.  But is it?  SVB’s collapse is due to a wider event, namely the Federal Reserve’s aggressive interest-rate hikes over the past year.  When interest rates were near zero, banks like SVB loaded up on long-dated, seemingly low-risk treasuries. But as the Fed raised interest rates to ‘fight inflation’, the value of those assets fell, leaving many banks sitting on unrealized losses. 

Higher rates have also hit the tech sector especially hard, undercutting the value of tech stocks and making it tough to raise funds.  So tech firms started to withdraw their cash deposits at SVB to meet their bills.  Ed Moya, senior market analyst at Oanda commented: “Everyone on Wall Street knew that the Fed’s rate-hiking campaign would eventually break something, and right now that is taking down small banks.” The other crack in the banking wall is in cryptocurrencies.  Crypto bank lender Silvergate has also been forced to liquidate after the collapse in bitcoin and other cryptocurrency prices and exchanges. 

“SVB’s institutional challenges reflect a larger and more widespread systemic issue: the banking industry is sitting on a ton of low-yielding assets that, thanks to the last year of rate increases, are now far underwater — and sinking,” said Konrad Alt, co-founder of Klaros Group.  Alt estimated that rate increases have “effectively wiped out approximately 28% of all the capital in the banking industry as of the end of 2022.”

SVB’s failure may be a one-off, but financial crashes always start with the weakest or the most reckless.  This is a bank that was being squeezed by the scissors of an impending slump: falling profits in the tech sector and falling asset prices caused by rising interest rates.  SVB had grown to about $209bn in assets with a client base concentrated among tech start-ups and so it proved particularly vulnerable to the impact of rapidly rising interest rates. But SVB’s losses on bond sales are being repeated for many other banks.  The FDIC recently reported that US banks are sitting on $620bn of combined unrealised losses in their securities portfolios.

Meanwhile, after the latest jobs figures continued to show a ‘tight’ labour market, the Federal Reserve seems set to continue to hike interest rates even faster and higher than financial investors expected.  Giving testimony to the US Congress last week, Federal Reserve chair Jay Powell made that clear: “Employment, consumer spending, manufacturing production and inflation have partly reversed the softening trends that we had seen in the data just a month ago.”  And as Larry Summers, the Keynesian guru and former Treasury Secretary, put it, “We’ve got to be prepared to keep doing what’s necessary to contain inflation.”  Possibly to the point of bringing down parts of the banking and corporate sector.

15 thoughts on “SVB: from the valley to the chasm

  1. Really enjoyed your headline. You are right, this is not the last bank to go bust. A banking crisis is a bit like making pop corn the old fashioned way. You heat the oil, the kernels fizzle and you wait and wait for the first one to pop knowing that once the first kernel pops all the other will begin to pop too. Over the course of last week, the KBW regional bank index which was trending around 110 on Monday fell to below 96 at the close on Friday, the biggest fall since the 2008 Financial Crisis. Again you are right to invoke slump as what is coming is much more comprehensive than 2008.

    It is worth adding that treasuries also did a double salto as well. The 2 year yield fell 0.49%, again not seen once since 2008. The inverted yield with the 10 year which had reached 1.06% the highest since the 1980s retreated to 0.8% still predicting recession.

    Given the US banks have $23 trillion in assets, and given these have been written down at best by 6% against an market fall of 17% in bonds and equities, I would suggest the FDIC figure of about $600 billion of unrecorded losses is on the conservative side as always happens before a banking crisis.

    Finally, confronted by a full blown financial crisis the FED is bound to execute a screeching handbrake turn over interest rates.

  2. The American intellectual class is in trouble now because how are they going to explain this to the people?

    Let’s remember that, according to neoliberal/monetarist theory, the free market should be a perfect system: there should be no misallocation of resources and money. The USA is the holotype of the free market theory.

    So, one might say, there are the Keynesian theorists that say the free market system is not perfect, just the best possible system. It must be constantly fixed/kept in its lane by wise and good politicians. This doesn’t save capitalism, because it is good to remember that, albeit Keynesian and their variants do claim the free market (i.e. capitalism) is not perfect, none of them claim its imperfections cause crises. Crises are always exogenous to capitalism/free market according to all variations of Keynesian theories in existence, extant or extinct. To them, 2008 was just an unfortunate series of blunders committed by exceptionally incompetent politicians; it was a serendipity.

    Then there is the far-right corner of legitimization of liberalism: the Austrian School. There’s not much to consider here, as the Austrians do not even have concept of cycle in capitalism: to them, there’s just the “entrepreneur instinct” on one side, which is infallible and perfect by definition, and the exogenous, alien and evil State, which only commits failures by definition. In practice there is only (perfect, always correct) allocation and misallocation of resources for them. When it happens on a macro scale they call it “misinvestment”, but the principle is the same. To the Austrians, capitalism isn’t even a system, so they don’t even bother to make a scientific analysis of it; in fact, they openly and proudly admit they’re just a philosophic (sophistic) school, not a scientific one. They’re the publicly declared cheerleaders of the capitalist class.

    The only theory that explains crises in capitalism is Marxism. And Marxism’s diagnosis on this situation is clear: there is no way the fall of the SVB is just an accident. True, the USA is still an industrialized nation and still has a lot of fuel in the tank left before it finally collapses, but it is dilapidating and is dilapidating faster than even the most optimist Marxist before 2008 could even imagine. Even better, the rise of China was more spectacular.

    If this trend continues up to at least 2050 (the year China claims it will be a moderately prosperous society, i.e. a country with the quality of life of Belgium at its apex), then I predict there will be a paradigm shift in humanity for the 21st Century: the ideals of Western Civilization will be demonized and relativized and the legacy of the USSR will be glorified and canonized. In the West, the far-right will rise proportionately as its economy will fall. The consolidation of the BRI will connect Eurasia through rail, shifting the center of power from sea to land once again. The Pacific Ocean will become the main battlefield between socialism (China) and capitalism (USA), with the corresponding decline in importance of the Northern Atlantic and thus of Europe, which will fulfill Marx’s prediction that it would become a “little corner”.

  3. Use values have two sources: labour and natural resources. Labour productivity has increase the production of use values. Of course, natural resources continue to be depleted. Money is a commodity which represents the wealth of nations. The price of commodities fluctuates around the value of the wealth crystallised in them. I don’t think the new amount of wealth produced by labour or found in nature has increased as much as the amount of money used to represent it. So, when the promissory notes which fiat currency or bonds represent, grow faster, the price of the universal equivalent commodity (money) decreases and it takes more units of the money commodity to obtain existing wealth. So, to keep the national currency from collapsing, the central banks restrict the supply of money by raising borrowing rates. This strengthens the currency and also exposes the speculative bubbles which have arisen over the years. This is what I think is happening now, all of which will result in a bit of Schumpeter’s ‘creative destruction’. Apologies for the interruption.

    1. But if creative destruction happens, we must discard the hypothesis of excess (imaginary; baseless) money, because bankruptcy and lower consumption in fact happened, i.e. this money that was wiped out really “represented” real things, made of natural resources that we can measure using natural sciences methods.

      Therefore, wealth as you defined it in your comment cannot exist. It must be just another idealist layer that adds up to the cluster of fetishism of the commodity.

  4. It’s worth adding that a largish number of regional banks are preparing for long long queues of depositors seeking to remove their money. Anyone remember the queues outside Northern Rock in 2008.

  5. What isn’t often reported is the hand-in-glove relationship between Silicon Valley and the US Department of Defense/Intelligence Community.
    The CIA (and it’s predecessor the OSS) was heavily weighted by Wall St. attorneys (William Donovan was related to Churchill and was one of his attorneys).
    The seed-money (venture capital) invested in the early years to fund semiconductor R&D was later used for the space program and then spy satellites (the true purpose of Nazi-NASA, not moon landings).
    Witness the close relationship between the CIA’s venture-capital arm (In-Q-Tel) and Silicon Valley Bank:
    There’s more here than meets the eye if the CIA can’t stop the implosion of one of its own…unless, of course, it’s a case of apoptosis (letting one part die so another can blossom).

    1. Just in time to – the DoD has made remarks about closely monitoring the situation, as they have technological interest in many of the startups that are going under.

      I’m sure that’s preferable to dealing with the big dogs that are soon going to hoover up the competition and monetize this desirable tech. Can’t wait for the large and bloated contracts the likes of Thiel and co will be negotiating with the military state.

  6. Overheard in the halls of the Federal Reserve, “Rate hikes were supposed to crush workers, not tech capitalists!”

    1. Actually that is the only rational way to comprehend Fed policy. The Fed acts to destroy aggregate worker demand using an incredibly inefficient tool that will produce great collateral damage. Call it “negative Keynesianism”, but it is still based upon the same demand side fallacy. But this is a topic for Michael’s current blog post, not here.

  7. Hard to believe that supposedly “savvy” tech capitalists would be sitting on virtual ZIRP State bonds this late in the game, when there was ample warning that Fed rates were going up. Even I am not that stupid. But what’s the evidence of falling profits in the “Tech sector”, depending on how that is defined. The firmware sector where I work is doing great. The latest spate of layoffs and hiring freezes is stock market finance driven, with payroll funds diverted to stock buybacks so the capitalists can distribute their options and shares.

  8. Meanwhile, for laughs:

    Krugman asks: “But both the money and the unfairness are really secondary concerns. The bigger question is whether, by saving big depositors from their own fecklessness, policymakers have encouraged future bad behavior. In particular, businesses that placed large sums with S.V.B. without asking whether the bank was sound are paying no price (aside from a few days of anxiety). Will this lead to more irresponsible behavior? That is, has the S.V.B. bailout created moral hazard?”

    Oh my, has it? In any case, I have the answer to my previous query. Capitalists can be as stupid as they wish.

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