Silicon Valley Bank was shut down on Friday, the largest US bank failure since 2008 financial crisis.
As many analysts have said, the Bank took on too many huge deposits, and was caught by higher interest rates. It kept a small part of deposits in cash and used the rest of them to buy long-term debt like Treasury bonds or invested it in mortgage-backed securities (MBS). It led to a mismatch of assets and liabilities.
Those investments offer good returns when interest rates remain low. However, SVB hadn鈥檛 considered that the Federal Reserve started hiking interest rate to combat the high inflation. Its clients, especially those technology start-ups who are sensitive to interest rates, are faced with reduced sources of funding and increasing expenditure. They begin withdraw their money. To fulfill customers鈥 requests, the Bank had to sell some investment at steep discounts. Rising interest rate hurt SVB鈥檚 bond portfolio. The panic began on Mar 8, when SVB admitted that it had lost nearly $2 billion. The Bank failed after run on deposits.
SVB goes bankrupt, but it is probably not another 鈥淟ehman Moment鈥 said some economist. Besides that the size of SVB is smaller, the investment by the Bank is guaranteed by the government. The collapse of the bank was mainly caused by mismatch of assets and liabilities.
The problem for start-ups to secure funding and the depreciation of bonds both came as a result of Fed鈥檚 interest rate hikes. Therefore, market players believe that Fed may turn more cautious in raising interest rate.
Will there be aid from government? Treasury Secretary Yellen ruled out SVB bailout. But during last weekend, the Fed said it will establish a 鈥淏ank Term Funding Program鈥 (BTFP) that will offer up to one year loans to certain banks. The Fed added it would be an 鈥渁dditional source of liquidity against high-quality securities, eliminating an institution鈥檚 need to quickly sell those securities in times of stress鈥. the attractiveness of BTFP lies in that eligible banks and firms must pledge US Treasures, agency debt, and mortgage-backed securities or other qualifying assets as collateral which will be valued at par (the price at which he assets were issued).
It鈥檚 not just start-ups feeling the pain. The Bank failure has shaken financial market confidence. On Monday, European stocks slumped, raising more worries in bank system. Expectation of interest rate hike cooled down. US dollar weakened and offshore Chinese yuan strengthened against USD. Gold price jumped and headed towards $1900, while crude oil pulled back to 3-week low.
Bond market was more severely impacted. 2-year US Treasury yield dropped more than 60 basis points to below 4.0% for the first time in 4 months, the biggest daily drop since 1987. It recorded whopping drop of nearly 100 basis points in three days.
Looking forward, we expected that,
1. Anticipation of interest rate cuts may enhance in the short term, and the pace could become faster than expected.
2. In the context of the Fed's interest rate hike, the shock to banks is inevitable. Silicon Valley bank failure is not accidental, and there are still risks.
3. In terms of direct impact, the risks to large banks are manageable, while small banks that are less resistant to risks will be hit more severely.
4. As to whether it will further lead to more systematic risks, it needs to be observed. The ripple effect of this incident is expected to get stemmed gradually, but there could still be risk event in the future.
