fact or fiction

Is it a fact or is it merely fiction? Fact or Fiction explores the lesser known truths in the corporate culture of Journal.

Is Silicon valley Bank collapse?
Last week, Silicon Valley Bank failed and was taken over by regulators. On Sunday, another bank, Signature Bank, was also closed. That day, the government stepped in to protect all of those banks’ deposits and create a way for other banks to get access to more cash. SVB collapse: After the Silicon Valley Bank (SVB) crisis, global equity markets and US dollar are under stress. In last fo sessions, US dollar rate has retraced from three month highs as Dollar Index has slipped from around 106 levels to around 103 levels while key benchmark indices on Wall Street lost up to 2 percent in Friday’s session. However, gold rates today climbed to the tune of $1,880 per ounce levels, logging around $65 per ounce spike since Thursday’s lows of around $1,815 levels. After failing to sustain above the 4 percent yield level, US bond yield has once again started to appreciate. Why did all that happen, and what could happen next? Since the pandemic began, Silicon Valley Bank SIVB -60.41%decrease; red down pointing triangle had been buying lots of what are often considered “safe” assets like U.S. Treasurys and government-backed mortgage bonds. But when interest rates start to rise quickly, as they did last year, their fixed interest payments don’t keep up with rising rates. Those assets were no longer worth what the bank paid for them, and the bank was sitting on more than $17 billion in potential losses on those assets as of the end of last year. Then last week, the bank faced a tidal wave of $42 billion of deposit withdrawal requests. It wasn’t able to raise the cash it needed to cover the outflows, which prompted regulators to step in and close the bank. Why was there a run on the bank? It is hard to say what specifically causes a run; it is a matter of crowd psychology. But fears may have emerged after the bank announced a capital raise and the sale of a large amount of securities at a loss. The bank catered to venture capitalists and technology startups. Because these were corporate deposits, they were often larger than the Federal Deposit Insurance Corp.’s $250,000 insurance limit. SVB had over $150 billion in uninsured deposits as of the end of last year. Could SVB have sat on paper losses until rates declined? In theory the bank could have muddled through, letting securities mature and getting back its money. This might have covered a relatively steady outflow of deposits until conditions changed. But it didn’t have that time after deposit withdrawals surged. What happened to Signature Bank? SVB’s problems appeared to spill over to Signature Bank, sparking its own depositors to make big withdrawal requests. Like SVB, Signature had a relatively large amount of uninsured deposits because of its business model catering to private companies. It probably didn’t help that the bank was one of the largest serving cryptocurrency firms. Another crypto-focused bank, Silvergate Capital SI -7.14%decrease; red down pointing triangle, close down on March 8. What happened to those uninsured deposits? The FDIC on Friday said that insured depositors of SVB would have access to their money no later than Monday morning. Initially, it said that uninsured depositors would receive a dividend, and then receivership certificates for the remaining balances that could be paid out over time, meaning repayment wasn’t certain. But then on Sunday, the FDIC, along with the Treasury Department and Secretary Janet Yellen, the Federal Reserve, and President Biden, said that they would use a “systemic risk exception” to cover the uninsured deposits of SVB and Signature. Customers could then also access these deposits on Monday morning. Hit on US-IPO market: On how this SVB crisis would impact equity market across globe, Kartik Jhaveri, Director — Wealth at Transcend Consultants said, “SVB and Signature Bank used to led startups and after the collapse of SVB and Signature Bank, cash flow for startups will remain challenged in the US for near term. This will have bad impact on US IPO market as startups planning to go for listing may postpone their public issue till the actual picture arrives.” SVB crisis impact on mutual funds: Asked about SVB crisis impact on the mutual fund market, Kartik Jhaveri said, “Debt funds won’t have much impact, neither in the US nor in India. However, for Indian mutual fund investors who have exposure in international mutual funds and international hybrid mutual funds, this news is not a good news. For the mutual fund investors in US, their equity mutual fund return for short term would be impacted but for medium to long term investors, it is wait and watch situation.” Impact on US dollar rates: “The SVB collapse has out uncertainty about the banking system in the US. Hence, both US economy and the US currency is expected to face investors’ ire in near term. So, US dollar rates are expected to remain under pressure till some concrete road map is announced from the US administration,” said Anuj Gupta, Vice President — Research at IIFL Securities. Was that a bailout of SVB and Signature? It is the case that the two banks’ uninsured depositors are receiving special government assurances. But the regulators stipulated that in the event that proceeds from the sale of the bank or its assets aren’t sufficient to cover the uninsured deposits, any losses to the Deposit Insurance Fund to cover them would be recovered by a special assessment charged to banks. The banks’ shareholders and unsecured bondholders—meaning those creditors to the bank who didn’t have explicit collateral backing their debts—weren’t given any support by regulators. What can we expect next? According to investment experts, this SVB collapse followed by Signature Bank closure, will hit bond yield, especially in treasuries badly. However, this is restricted to US bond market only, for Indian treasuries, which are regulated by Reserve Bank of India, this crisis won’t have much impact. For, mutual fund investors, those Indians investing in international and international hybrid funds will be affected by the recent SVB and Signature Bank collapse. Likewise, in forex market, those who have position in dollar may have to face the beating as US dollar has retraced from 3-month highs in last three days by a larger extent. Dollar Index is current quoting 103.523, which was quoting close to 106 levels on Thursday. But, the biggest hit of this banking crisis in the US would be IPO and US equity market. They said that banks that have reported collapse in last three days were major lenders for the US-based startups. So, after the failure of these banks, IPO market is expected to nosedive in near term whereas equity market would be under enormous stress in the US. The process of attempting to sell off SVB will be closely watched. Attention will also turn to longer-term questions about banks’ health, which investors are already asking. The Fed’s borrowing facility may solve acute cash problems, but it won’t do anything to rebuild the value of banks’ securities portfolios, assuming interest rates stay around where they are. Banks in many ways had fallen off Washington’s radar in the years since the financial crisis. That has all changed now. Update from silicon valley Bank bridge CEO: Yesterday I shared the news that I was appointed as the CEO of Silicon Valley Bridge Bank, N.A. We are doing everything we can to rebuild, win back your confidence, and continue supporting the innovation economy. We recognize the past few days have been an extremely challenging time, and we are grateful for your patience. We are open for business and are hard at work bringing all systems and solutions back online to support you. We are making new loans and fully honoring existing credit facilities. The number one thing you can do to support the future of this institution is to help us rebuild our deposit base, both by leaving deposits with Silicon Valley Bridge Bank and transferring back deposits that left over the last several days. As stated in yesterday’s announcement, depositors have full access to their money and both new and existing deposits are fully protected by the FDIC. This action by FDIC effectively means that deposits held with SVB are among the safest of any bank or institution in the country. If you, your portfolio companies, or your firm moved funds within the past week, please consider moving some of them back as part of a secure deposit diversification strategy. We are also open for business for any new customers. We are actively opening new accounts of all sizes and making new loans. Please reach out to your SVB team with any questions. We will be sharing more updates as we continue our work to support the innovation economy.
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