48 hours is all it took for Silicon Valley Bank (SVB) to become the second-worst banking failure in the US, after Washington Mutual's collapse in 2008. The background of the two could not be more different though. SVB mainly focuses on companies, as it is arguably the key player for liquidity for tech startups and venture capitalists in the environment, while Washington Mutual was a firm that catered more towards retail clients.
That explains why SVB has a rather lopsided portfolio when it comes to the nature of their deposits, with over 90% being uninsured deposits i.e. exceeding the FDIC’s insurance limit of $250,000.
As such, this bank run was not your usual one in the sense that it happened to a rather peculiar bank, that catered to a rather unique sector of clients. One can argue that the risks involved may be more idiosyncratic but it isn't that simple.
Let's take a quick look at some relevant information in making sense of the supposed "sudden" collapse in SVB.
For starters, the warning signs have already been there.
This is probably one of the best takes on what were the underlying problems at SVB and guess what? It was put out back on 18 January. It covers the whole HMT issue, which Adam also pointed out here. In essence, rising interest rates are becoming more of a problem for banks as they take a hit on their bonds portfolio.
This Wall St Journal piece (may be gated) from last year is also a warning that SVB isn't the only player that may be facing such strains. There are some bigger names involved but perhaps their risk and credit management are not as shoddy as what was taking place at SVB.
The saying tends to go that the Fed usually hikes until something breaks, and this might be that something.
Now, SVB isn't your "too big to fail" kind of market actor and that is perhaps why we are getting a bit of a debate as to whether or not lawmakers and policymakers might actually step in to bail out the situation.
Essentially, that's where we are at now.
Looking over at their immediate client exposure, there are some big names that are directly impacted from SVB. You can check out the individual disclosures here if you want to go into more detail. The list below is accurate as of the standings on 10 March (h/t Ben Hoban @wbhoban for making a neat summary for some of the more relevant ones):
Roku is obviously one of the biggest names on the list and having an approximately 26% cash balance exposure is a big risk.
The real fear is how all of this trickles down to the connected parties and how that all interlinks to other firms which are not directly involved with SVB. The potential spillover effect may be massive but again, all of this is taking place inside this ecosystem of tech startups mostly.
To put things more bluntly, this isn't the collapse of the main banking sector and financial system in the economy. This is pretty much just a failure of a peculiar bank in a rather niche ecosystem that makes up for just one part of the economy.
Now, that is not to say that one should discount the risks involved with such a failure though. Always remember, markets and in this instance, humans are driven by emotions at their very core. And fear is an extremely powerful one, to say the least.
The traumatic experience from the global financial crisis will definitely reignite plenty of that again over the weekend and come tomorrow, people will be looking to the FDIC to try and broker a sale of SVB to try and calm fears of a more widespread contagion.
Now, in a more logical sense, SVB doesn't quite have the status to cause a 2008-09 dominoes effect in the financial system but the fear that it could, might have that sort of potential. In essence, it is sort of self-fulfilling as overblown and sensationalist headlines spread panic and hysteria, and everyone's reaction gets influenced into thinking that "this is Lehman Brothers all over again".
So, what's next?
All eyes will be on whether we will see SVB get bought out by another market actor and that will take care of itself, in the sense that it will cover for depositors (yes, including those uninsured) and the fear of contagion stops there.
I would think that the FDIC and the Fed would not want to see tech startups go bust en masse and the best way to prevent something disorderly from taking place would be just that.
I mean, there is definitely a real possibility that SVB just dies off and having to sell all of its assets at a haircut, failing to cover all of its depositors. However, that is worst-case scenario and something that lawmakers and policymakers would want to actively avoid since it may potentially trigger bank runs elsewhere as the fear continues to spread.
I reckon come Monday, the fear and distress all across markets would still be high and that might continue for a bit. This is contingent of course to a deal being brokered for SVB to be sold off, which perhaps could take a while within the next week.
In that sense, headlines will be everything. And if there isn't anything, I think markets will be comfortable to sell first and ask questions later until the silence is broken. But the minute anything hits the wires about a SVB deal, expect markets to turn on its head and risk trades to start recovering.
As always in times like these, I will always preach the mantra of buy value, sell hysteria.
