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First Silvergate Bank (SB) and Silicon Valley Bank (SVB) has crumbled.
Not too long ago, the former had $15 billion in customer deposits, while the latter had $175 billion.
In SVB’s case, we’re talking about the largest bank to fail, since the 2008 Great Financial Crisis (GFC).
So, how could so much go wrong in such a short span of time?
As is known, when you deposit your money with a bank, the banks don’t usually keep all of the deposited money as a reserve, in fact, just a fraction of it is held as cash.
Most of the money is actually either lent out to borrowers or invested into securities.
SB and SVB invested money into these securities that were of very low yield, such as 10-year US treasury bills that were yielding ~1%.
However, currently, the US Federal Reserve (Fed) has been hiking interest rates, rising to 4.57%. There’s a sizeable difference between ~1% vs. 4.57%.
Now, this is where our product ‘Fixed EMI for life’ can become a great solution as it offers hedging that could mitigate the risk arising from the rise in interest rates. The potential loss and bank run could have been avoided for SVB if it would have hedged its securities with interest rate swaps.
If most of the investments made by SVB were hedged similarly to our product mechanism. This can help alleviate the downfall of SVB. Therefore, our product ‘Fixed EMI for life’ will help in mitigating interest rate risk especially when markets are volatile.
So, naturally, people gravitate towards securities yielding the latter, leading to a drop in the price / value of the former.
At this point, you might ask yourself, why couldn’t SB / SVB just sell their old, low-yielding securities for new, high-yielding ones?
Well that’s because they’d now have to sell at a loss, due to the demand-supply imbalance.
Just take the example of SVB, which took an 8.6% haircut on selling $21 billion of arguably its most liquid and tradable securities, that’s a loss of $1.8 billion. It likely would’ve been even larger on less liquid securities.
In SB’s case, they too lost around $1 billion from having to sell their low-yield securities, which is virtually equivalent to all the profits that SB made over the past ~10 years, cumulatively.
You might now have a counter-question, that if they had to sell at a loss, then why sell at all?
Due to pressure from deposit withdrawals.
To meet depositors’ withdrawal requests, they had to liquidate securities and do so fast.
This leads to another question of why SB and SVB have had it worse than other banks in the US?
That comes down to concentration of risk.
In SB’s case, its depositor / client-base was crypto-heavy, while SVB was focused on start-ups and venture capital (VC) firms.
Both their respective target ecosystems have been going through a rough patch, which has in-turn especially hurt the flow of deposits at these concentrated banks in particular.
So, when news that things at SB / SVB were looking shaky started going around, a bank run ensued.
For instance, in SVB’s case, many VCs nudged their portfolio companies to shift their money to another bank.
After a point, keeping up with withdrawal requests likely became simply infeasible, as these banks couldn’t sell enough of their securities / raise capital / secure a bailout / sell themselves off, and had no choice but to fall into receivership or kickstart voluntary liquidation.
Author is a Fin-tech entrepreneur having excellent track record of over 20 years of banking and financial industry in U.A.E, Saudi Arabia and India. Wide-range of experience in Corporate & Wholesale Banking, Treasury, Investment Banking, Funds, Corporate, Commercial, Credit, Cash, Trade Finance, & Islamic Operations.
Outclass expertise in Products & Regulatory Controls, Risk Management, in “Business Modeling” focused on bespoke client products along with technology adoption. Proven in-depth understanding of micro/macro financial market econometrics, Offshore, Cross Border Banking and Legal Barriers.
Major Strengths:
• Debt & Asset Management
• Treasury, Investment & Funds
• Credit Management & Product Development
• Structured products and Restructuring
• Hedging and Derivative Markets
• FinTech & Reg Tech Advisory
Expert in Regional/Global Regulatory operational management having exemplary accolades in Islamic Banking with high end achievements in structured products.
Expertise in Global Intelligence, Value Research, Product Development & Processing, projects related to current global disruptive technological changes & its adaptation through FinTech Landscape – micro/macro.
Author is a Fintech Writer, Market Researcher, Speaker & Panelist in various International Banking & Technology Forums: Terrapin, Clear stream/Euroclear, Fleming, BII, Allan Lloyds, Trescon, Alpha-one, PWC, Finastra Universe - Misys-Connect etc.
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