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24th March 2023
The causes of Silicon Valley Bank's(SVB) bankruptcy and the sustainability of the US banking system
On 11th March, California regulators declared the bankruptcy of Silicon Valley Bank(SVB), which was the 16th largest US bank with $212bn in assets. According to The Associated Press, SVB became the second largest bankrupt in US history (after Washington Mutual Bank, which went bankrupt in 2008). Following SVB, US regulators shut down Signature Bank, which handled cryptocurrency. The bank was one of the top 30 US banks with $110bn in assets.
Timur Turvlov, CEO and founder of Freedom Holding said:
"The key reasons are actually very interesting. The banks faced a classic bank run, which was triggered by customer worries about whether the bank would lose too much money due to the impairment of its stocks portfolio. The key problem at Silicon Valley Bank was that at some Wells Fargo’s, about 85% of deposits are insured, they are covered by the sum insured. In America, there is the FDIC, the American Deposit Guarantee Fund, which covers deposits up to $250,000. If the bank goes bankrupt, they, accordingly, pay out the money to depositors the next day. At Silicon Valley Bank, depositors with deposits under $250,000 accounted for about 5% of the total balance-an incredibly small number, just like at Signature Bank. They were very much focused on rich clients, on corporate clients.”
In the expert's opinion, the bank's management made no fundamental mistakes in terms of portfolio management. The bank invested in reliable instruments and tried to avoid risks: most of the assets($120bn) were placed in liquid stocks, mainly bonds. The returns on the portfolio, which consisted of instruments with a duration of up to 10 years, were 1-2% per annum. When the venture capital industry found itself in a cyclical downturn, interest rate risk began to weigh on the bank's capital. As a result, the bank's deposits began to shrink and the company began to sell stocks from its portfolio-asset revaluation losses due to an increase in the US base interest rate emerged. Due to low bond yields(1-2% per annum), clients demanded a higher discount from SVB in order to get higher yields at the same coupon rate.
Turlov believes that US bank failures are a direct consequence of an increase in the benchmark interest rate:
"To imagine a classic deflationary crisis, a crisis of a chain of bank failures, under the current architecture of the global monetary system in general, which exists, is actually impossible. Under the gold standard, fixed monetary circulation, when you couldn't just take money and print it -that was exactly the typical story. And the famous medieval European banking crises, which could last for decades, led to an almost incessant chain of bank failures one after another. Now, in fact, if the regulator starts to see any signs of systemic problems, it can obviously first of all always saturate the same banks with money in order to stop this, because any deflation, any chain of bankruptcies and destabilisation of the financial system will do incommensurably more damage to the economy than any inflation."
Nevertheless, the problems now emerging in the US financial system will hinder inflation. The Fed will give banks access to unlimited liquidity, in particular issuance will be made to buy back the assets of banks facing depositor outflows. According to Turlov, the Fed will continue to raise rates, some financial institutions will continue to withdraw from the market, and their shareholders and junior lenders will lose money. That said, there is no doubt that US banks will cope with further rate hikes-such changes to the system are tested through stress tests. The backbone of financial market resilience is provided by unrestricted access to liquidity and profit growth for US companies.
Freedom Finance Trends(4 articles)