"We are proud to be included in the annual Forbes list of the best American banks for the fifth year in a row, and also to be nominated for the magazine's list of the best financial institutions."
That was the text of an enthusiastic tweet posted on the official account of Silicon Valley Bank, known as SVB, on March 6 (before the account was later closed), a tweet that did not receive much attention at the time. .
In fact, the inclusion of this bank in the "Forbes" lists was a matter of habit, as one of the most famous banks in America, which defines itself as "the financial partner to innovative economies."
Until then, SVB Bank was a giant, well-established American banking institution, with a history of 40 years of banking, specializing in financing and supporting emerging companies not only in America, but also extending its activities to China, India and the rest of the world, and owning assets worth 200 billion. dollars, and has more than 8,500 employees distributed across dozens of branches and headquarters in America and around the world.
Therefore, the great shock that no one imagined was that only several days after this tweet was published, and by the end of the same week, the “financial partner of innovative economies” turned into a bankrupt bank, and “40 years of banking services” turned into suffering to pay customer deposits, in One of the most serious banking collapses that the world has witnessed since the global financial crisis in 2008. (1, 2, 3, 4, 5)
Founders Bank
SVB Bank is the largest in the global startup financing sector.
(Anatolia)
In order to understand what happened, we must first point out the status of SVB Bank in the banking and investment map in America and the world.
Simply, it can be said that Silicon Valley Bank - as its name indicates exactly - is a bank directed to startups and their investments mainly, so it can be described as the "Founders Bank".
In clearer terms, if you found a startup in America or in other strongholds of startups around the world, you will often either get financing from this bank, or you will deposit the financing you got in it.
SVB Bank was founded in 1983, and began its journey by injecting venture capital into some technology companies, but its role emerged in the mid-1990s with the increase of its activities in the financing sector for emerging technology companies in Silicon Valley.
Later, at the beginning of the millennium, the bank opened branches in India, China and Europe, and began monitoring and financing startups active outside America, until the number of startups that the bank funded or cooperated with by 2011 reached more than 30,000 companies.
In recent years, Silicon Valley Bank has turned into one of the largest banks in America, so that the "Fortune" financial newspaper said in a report that the bank has accounts for more than 50% of high-risk startups in America alone, and that venture investment activities and ownership stakes In emerging projects, they are estimated at 56% of the bank's total activity globally.
The crisis is on the horizon
Despite being an unconventional bank in some way, the way SVB works does not deviate from the traditional way of banks: dealers place deposits in the bank for a specific interest, and at the other end the bank uses these deposits by granting interest loans to institutions and companies or using these funds to finance High-risk start-up projects that generate big profits later.
The bank achieves its revenues and profits through the difference between loan and deposit rates, and financing returns, depending on its accurate choices of fast-growing companies and institutions.
(communication Web-sites)
During the period between 2019 and the beginning of 2022, interest rates were very low, ranging between 0.25% and 0.50%, with the activity of the markets and the pumping of large funds into emerging projects with large valuations.
The rule here says: The lower the interest of banks, this is evidence of the strength of the market and the higher rates of investment in projects that bring greater profits than the interest of banks.
Well, for SVB Bank, it operates on the one hand as a traditional bank, and on the other hand it is a source of financing for high-value tech startups, which makes it closer to a banking and investment destination together.
During that period, deposit rates in the bank increased dramatically, from $60 billion in 2019 to $189 billion in 2022.
With the continued decline in interest rates during that period, and the need to operate this huge liquidity deposited in the bank to generate profits greater than bank loans or financing emerging projects, this prompted the bank to search for investment in other areas that are highly safe and have a good return compared to the low interest rate at the time.
The bank invested about $80 billion in mortgage backed securities, which are considered high-security debt instruments with an estimated return of 1.5% on average.
Of course with very low interest rates close to zero, 1.5% is not bad.
The only big problem will come if interest rates start to rise.
Unfortunately, this was what actually happened, since March 2022 the US Federal Reserve raised the interest rate more than 7 times to meet global inflation, until it reached a ceiling of 4.75%, which means that the bank is paying more amounts to depositors, compared to low returns it gets. them from his investments.
In a clearer sense, the difference began to widen to turn into a crisis in the provision of sufficient liquidity by the bank to depositors.
The matter was exacerbated by the refusal of many venture investment institutions to pump funds for startup companies, and then the decline in the rate of companies depositing their money in the bank.
(6)
crunch time
On the eighth of March, and with the increasing need for the bank to meet the requirements of depositors by providing their money in light of the lack of financial liquidity, the bank decided to sell bonds worth $ 21 billion, incurring a loss of about $ 1.8 billion in the process, in addition to announcing its intention to issue more. $2.25 billion in bonds to bridge the financing gap.
The aim behind these measures was to free up some capital and provide more liquidity, but this particular measure was like the sparks that ignited a fire that could not be extinguished.
Put yourself in the place of depositors: you have a huge bank that sold bonds it had previously invested in, and was satisfied that it did so at a great loss in return for providing liquidity at any price, in addition to issuing new bonds and offering them for sale.
What conclusion can jump to your mind other than that this bank has real liquidity problems and is trying to delay the time when it announces its inability to refund depositors?
It was at this exact moment that a wave of panic began among the bank's customers.
With everyone panicking, press releases were issued to add more fuel to the fire, with the news of the collapse of SVB Bank's stock, which plunged by more than 70%, and that it began a journey of unstoppable free fall.
With the advent of the ninth of March, with a further collapse in the value of the share, thousands of depositors’ requests poured in to withdraw $42 billion worth of deposits in one day, which is impossible for any bank, whatever its financial resources, to meet, which exposed it to the phenomenon of “crowding.” Bank Run, which is the famous economic phenomenon associated with depositors' panic about the imminent bankruptcy of banks and their inability to return deposits.
The road to bankruptcy
The Federal Depositors Insurance Corporation (FDIC) took over the management of SVB Bank, and began studying how to pay depositors' money during the coming period.
(Shutterstock)
With the continuous collapse of the bank's shares, "SVB" announced that it had reversed its tendency to issue more bonds, and that it was offering itself for direct sale to investors as a last resort to get out of the crisis instead of falling into more losses.
These rapid transformations that took place in just two days for the most important bank in the world of startups in America and large regions around the world led to an increasing wave of panic and the demand of depositors and investors to withdraw their money from the bank in record time, especially with the calls of influential investors in Silicon Valley to the founders of the companies. startups to withdraw their companies' funds as soon as possible, otherwise the companies' funds will be frozen for a long time.
On March 10, the US government's Federal Depository Insurance Corporation (FDIC) closed the bank completely and began procedures to provide liquidity to clients.
The Corporation provides funds to all depositors in the banks dealing with it, up to a maximum of a quarter of a million dollars per account.
The surprise was that only 3% of SVB depositors' accounts are covered by insurance, and 97% of accounts are outside direct coverage.
Despite government statements reassuring the bank's dealers that everyone who did not get his money in full, it will be managed during the coming period upon completion of the sale of the bank's huge assets. Officially after several days, which raises great suspicions of corruption that are still being investigated on a large scale, and more facts will become clear later.
The scene is hazy
Regulators need to step in to do a *backstop* of depositors (not a bailout of a bank)
40,000 SVB depositor small businesses
30% will fail to make payroll in the next 30 days
Estimate 10 employees each
120,000 jobs on the line
Years of US innovation on the line
— Garry Tan 陈嘉兴 (@garrytan) March 11, 2023
"If the government doesn't get involved, I think a whole generation of startups will be wiped off the planet!"
This statement was made by Gary Tan, CEO of YCombinator, the largest accelerator in America that invests in startups around the world, including the Middle East and North Africa.
With the great influence of the “SVB” bank on startups, whether in America or around the world, especially in China and India, it is likely that many startups will go through difficult times, in the short term, in paying their operating bills with their inability to obtain their funds held in The bank, or in the long run, the faltering of new funding rounds.
( 7 )
The scene seems very murky until the moment of writing these lines, according to financial analysts, the collapse of the "SVB" bank is the largest collapse that the banking sector has witnessed since the global financial crisis in 2008, which sounds a new alarm for the possibility of the collapse of more financial institutions, especially since this bankruptcy comes directly Days after the collapse of another bank, albeit of a smaller size, which is the "Silvergate" bank, which focuses on investing in digital currency companies in particular, it was directly followed by the collapse of a third bank, "Signature Bank", which is another bank that is active in financing startups.
I'm open to the idea
— Elon Musk (@elonmusk) March 11, 2023
Until now, no one knows exactly what will be the fate of the Silicon Valley Bank (SVB), which transformed in two days from a giant global financial and banking institution into an institution mired in bankruptcy. A businessman to buy the bank and restart it with different standards, and of course the name "Elon Musk" will be in the foreground, after he tweeted a brief tweet indicating that he is open to the idea of investing in the bank and getting involved in the matter.
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Sources:
1 - How does a bank collapse in 48 hours?
A timeline of the SVB fall
2 - SVB is the largest bank failure since the 2008 financial crisis
3 - Silicon Valley Bank's Collapse Causes Start-Up Chaos
4 - Explainer: What Is The Silicon Valley Bank Crisis All About?
5 - Here's how the second-biggest bank collapse in US history happened in just 48 hours
6- The US Federal Reserve raises the interest rate by 50 basis points... and Gulf central banks keep pace with that
7 - Silicon Valley Bank failure could wipe out 'a whole generation of startups'