Largest Bank Failure Since 2008 Sparks Market-Wide Fear
With Silicon Valley Bank going under in the blink of an eye, panic is setting in for the venture capital and tech world. Circle announces exposure to the bank and the USDC peg fights to stay at $1.
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Largest Bank Failure Since 2008 Sparks Market-Wide Fear
The latest broader market selloff has everyone scrambling to make sense of what’s going on, especially with the latest news that Silicon Valley Bank (SVB) was forced to close today, resulting in an FDIC-created deposit insurance bank to take on all their deposit liabilities. SVB is the bank of choice for much of the American venture capital and startup world and is the 18th largest U.S. bank by size of total assets. SVB’s demise would make it the second largest bank failure in U.S. history.
Why does this matter? The collapse of SVB follows just days after the liquidation of Silvergate Bank and there’s been a few other large, regional banks that are shedding equity value today amid more concerns around contagion in the banking sector.
From the FDIC press release, the amount of uninsured deposits is still unknown:
“As of December 31, 2022, Silicon Valley Bank had approximately $209.0 billion in total assets and about $175.4 billion in total deposits. At the time of closing, the amount of deposits in excess of the insurance limits was undetermined. The amount of uninsured deposits will be determined once the FDIC obtains additional information from the bank and customers.”
Yet in SVB’s year-end report for 2022, they disclose that they have around $151 billion in uninsured deposits as their base is largely composed of institutional clients. That detailed report can be found here and Joseph Wang explains it more in-depth here.
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The overall impact is that those who have their money with SVB will lose access to uninsured funds for the time being, impacting the ability of many startups and businesses to access their capital, thus increasing default and bankruptcy risks. There is some nuance for uninsured depositors, as the FDIC stated that it will pay uninsured depositors an advance dividend and receivership certificate for the remaining amount of their uninsured funds. While the exact meaning of this is uncertain, the likely scenario is that uninsured depositors aren't made whole but don’t completely lose all of their capital held at the bank. All of this may change if a larger bank buyer steps in to acquire SVB over the next few days or weeks.
“All insured depositors will have full access to their insured deposits no later than Monday morning, March 13, 2023. The FDIC will pay uninsured depositors an advance dividend within the next week. Uninsured depositors will receive a receivership certificate for the remaining amount of their uninsured funds. As the FDIC sells the assets of Silicon Valley Bank, future dividend payments may be made to uninsured depositors.”
On the banking side, SVB received loans from the San Francisco Federal Home Loan Bank (FHLB) making up 20% of their loan book. Other regional banks in this list are some of the stocks losing the most value in market trading today.
Source: FHLBank San Francisco 10-Q
Source: Charlie Bilello
SVB showed that they had $180 billion in liquidity just 10 days ago.
The following is a summary of events for these regional banks that are seeing their share prices plummet, including what previously happened with Silvergate Capital and is now in the process of playing out with Silicon Valley Bank:
These banks catered to venture capital and crypto companies so their deposits went exponential during the post-2020 bubble.
As short-end rates were pinned at 0% due to zero-interest-rate policy, these banks were suddenly flush with deposits and decided to make investments in long-duration securities in a bid for yield.
As the bond bubble burst, these firms faced massive unrealized losses that were forced to be realized in the case of mass withdrawals.
As the banks sold their bonds, the unrealized losses were crystallized, which led to panic from equity investors and depositors in a reflexive cycle which then led to a death spiral for the bank.
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An Important Distinction
With many banks coming under severe pressure in recent days and weeks, it is important to make a key distinction between today and the Great Financial Crisis in 2008.
During the GFC, total liabilities in the banking system relative to cash on hand hit absurdly high levels, otherwise known as leverage.
Liabilities relative to cash on hand hit 33x, compared to just 6.5x today. While there is obviously still leverage — as the banking industry is built upon the concept of a fractional reserve — the chances of a full-blown systemic banking crisis similar to the Great Financial Crisis don’t exist in the same way today. Following the GFC, new regulations were put into place to better control bank leverage and liquidity.
However, the prevalence of bad apples — specifically those who are heavily exposed to long-duration investments — are real, and this leaves the potential for more blowups in the future, with a particular eye on the worst performers in the financial industry in recent days. The pervasiveness of too-big-to-fail has not been eliminated, but exists in a different way than it did in 2008, due to the underlying conditions of the banking system.
The rest of this article is open to paying members only. Here’s what’s behind the paywall 🔏:
Why investors are spooked by Circle and USDC is fighting to keep its $1 peg. 💵
The makeup of the Curve pool and the flight to certain stablecoins. 🛫
USDC redemptions and what to watch going into the weekend. 🏃♂️
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