SVB: from the valley to the chasm

13 March by Michael Roberts

On Friday, Californian bank Silicon Valley Bank (SVB) became the largest bank to fail since the 2008 financial crisis. In a sudden collapse that shocked financial markets, it left billions of dollars belonging to companies and investors stranded.

SVB took deposits from and made loans to companies in the heartland of America’s tech sector. The US Federal Deposit Insurance Corporation (FDIC) is now acting as a receiver. The FDIC is an independent government agency that insures bank deposits and oversees financial institutions, which means it will liquidate the bank’s assets to pay back its customers, including depositors and creditors.

What happened to SVB and is this a one-off or a signal that there are more financial crashes to come? The immediate development was the announcement by SVB that it had sold at a loss a bunch of securities it had invested in and that it would have to sell $2.25 billion in new shares to try and shore up its balance Balance End of year statement of a company’s assets (what the company possesses) and liabilities (what it owes). In other words, the assets provide information about how the funds collected by the company have been used; and the liabilities, about the origins of those funds. sheet. That triggered a panic among key tech firms in California which held their cash at SVB. There was a classic run on the bank. With lightning speed, the bank had to stop depositors withdrawing cash. The company’s stock price collapsed, dragging other banks down with it. Trading Market activities
Buying and selling of financial instruments such as shares, futures, derivatives, options, and warrants conducted in the hope of making a short-term profit.
in SVB shares was halted and then SVB abandoned efforts to raise capital or find a buyer, leading to the FDIC taking over control.

While relatively unknown outside of Silicon Valley, SVB was among the top 20 American commercial banks (the 16th largest), with $209 billion in total assets at the end of last year, according to the FDIC. It’s the largest lender to fail since Washington Mutual collapsed in 2008 during the global financial crash. So, contrary to some reports, SVB is no minnow. It offered services to nearly half of all venture-backed tech and health care Care Le concept de « care work » (travail de soin) fait référence à un ensemble de pratiques matérielles et psychologiques destinées à apporter une réponse concrète aux besoins des autres et d’une communauté (dont des écosystèmes). On préfère le concept de care à celui de travail « domestique » ou de « reproduction » car il intègre les dimensions émotionnelles et psychologiques (charge mentale, affection, soutien), et il ne se limite pas aux aspects « privés » et gratuit en englobant également les activités rémunérées nécessaires à la reproduction de la vie humaine. companies in the US. SVB held money for these ‘venture capitalists’ (those that invest in new ‘start-up’ companies).

But it also made investments with the cash deposits it got, extending sometimes risky loans to tech founders personally as well as to their companies. But its investments started to make losses. SVB had bet on buying seemingly safe US government bonds. However, as the Federal Reserve FED
Federal Reserve
Officially, Federal Reserve System, is the United States’ central bank created in 1913 by the ’Federal Reserve Act’, also called the ’Owen-Glass Act’, after a series of banking crises, particularly the ’Bank Panic’ of 1907.

FED – decentralized central bank :
began its cycle of hiking interest rates Interest rates When A lends money to B, B repays the amount lent by A (the capital) as well as a supplementary sum known as interest, so that A has an interest in agreeing to this financial operation. The interest is determined by the interest rate, which may be high or low. To take a very simple example: if A borrows 100 million dollars for 10 years at a fixed interest rate of 5%, the first year he will repay a tenth of the capital initially borrowed (10 million dollars) plus 5% of the capital owed, i.e. 5 million dollars, that is a total of 15 million dollars. In the second year, he will again repay 10% of the capital borrowed, but the 5% now only applies to the remaining 90 million dollars still due, i.e. 4.5 million dollars, or a total of 14.5 million dollars. And so on, until the tenth year when he will repay the last 10 million dollars, plus 5% of that remaining 10 million dollars, i.e. 0.5 million dollars, giving a total of 10.5 million dollars. Over 10 years, the total amount repaid will come to 127.5 million dollars. The repayment of the capital is not usually made in equal instalments. In the initial years, the repayment concerns mainly the interest, and the proportion of capital repaid increases over the years. In this case, if repayments are stopped, the capital still due is higher…

The nominal interest rate is the rate at which the loan is contracted. The real interest rate is the nominal rate reduced by the rate of inflation.
to “control inflation Inflation The cumulated rise of prices as a whole (e.g. a rise in the price of petroleum, eventually leading to a rise in salaries, then to the rise of other prices, etc.). Inflation implies a fall in the value of money since, as time goes by, larger sums are required to purchase particular items. This is the reason why corporate-driven policies seek to keep inflation down. ”, the value of these government bonds fell sharply and SVB’s balance sheet began to take water. When it informed the financial world that it was selling these bonds at a loss to meet customer withdrawals of cash, the run on the bank flooded through. On failing to get extra funding by selling shares, SVB had to declare bankruptcy and go into FDIC receivership.

Some are brushing off the idea that SVB’s collapse is a sign of things to come. “SVB was small, with a very concentrated deposit base”, said Amundi’s head of European equity Equity The capital put into an enterprise by the shareholders. Not to be confused with ’hard capital’ or ’unsecured debt’. research, Ciaran Callaghan. It was “not prepared for deposit outflows, didn’t have the liquidity Liquidity The facility with which a financial instrument can be bought or sold without a significant change in price. at hand to cover deposit redemptions, and consequently was a forced seller of bonds that drove an equity raising and created the contagion. This is very much an isolated, idiosyncratic case.”

So it’s a one-off. But is it? SVB’s collapse is due to a wider event, namely the Federal Reserve’s aggressive interest Interest An amount paid in remuneration of an investment or received by a lender. Interest is calculated on the amount of the capital invested or borrowed, the duration of the operation and the rate that has been set. -rate hikes over the past year. When interest rates were near zero, banks like SVB loaded up on long-dated, seemingly low-risk treasuries. But as the Fed raised interest rates to ‘fight inflation’, the value of those assets fell, leaving many banks sitting on unrealized losses.

Higher rates have also hit the tech sector especially hard, undercutting the value of tech stocks and making it tough to raise funds. So tech firms started to withdraw their cash deposits at SVB to meet their bills. Ed Moya, senior market analyst at Oanda commented: “Everyone on Wall Street knew that the Fed’s rate-hiking campaign would eventually break something, and right now that is taking down small banks.” The other crack in the banking wall is in cryptocurrencies. Crypto bank lender Silvergate has also been forced to liquidate after the collapse in bitcoin and other cryptocurrency prices and exchanges.

SVB’s institutional challenges reflect a larger and more widespread systemic issue: the banking industry is sitting on a ton of low-yielding assets that, thanks to the last year of rate increases, are now far underwater — and sinking,” said Konrad Alt, co-founder of Klaros Group. Alt estimated that rate increases have “effectively wiped out approximately 28% of all the capital in the banking industry as of the end of 2022.”

SVB’s failure may be a one-off, but financial crashes always start with the weakest or the most reckless. This is a bank that was being squeezed by the scissors of an impending slump: falling profits in the tech sector and falling asset Asset Something belonging to an individual or a business that has value or the power to earn money (FT). The opposite of assets are liabilities, that is the part of the balance sheet reflecting a company’s resources (the capital contributed by the partners, provisions for contingencies and charges, as well as the outstanding debts). prices caused by rising interest rates. SVB had grown to about $209bn in assets with a client base concentrated among tech start-ups and so it proved particularly vulnerable to the impact of rapidly rising interest rates. But SVB’s losses on bond Bond A bond is a stake in a debt issued by a company or governmental body. The holder of the bond, the creditor, is entitled to interest and reimbursement of the principal. If the company is listed, the holder can also sell the bond on a stock-exchange. sales are being repeated for many other banks. The FDIC recently reported that US banks are sitting on $620bn of combined unrealised losses in their securities portfolios.

Meanwhile, after the latest jobs figures continued to show a ‘tight’ labour market, the Federal Reserve seems set to continue to hike interest rates even faster and higher than financial investors expected. Giving testimony to the US Congress last week, Federal Reserve chair Jay Powell made that clear: “Employment, consumer spending, manufacturing production and inflation have partly reversed the softening trends that we had seen in the data just a month ago.” And as Larry Summers, the Keynesian guru and former Treasury Secretary, put it, “We’ve got to be prepared to keep doing what’s necessary to contain inflation.” Possibly to the point of bringing down parts of the banking and corporate sector.

Michael Roberts

worked in the City of London as an economist for over 40 years. He has closely observed the machinations of global capitalism from within the dragon’s den. At the same time, he was a political activist in the labour movement for decades. Since retiring, he has written several books. The Great Recession – a Marxist view (2009); The Long Depression (2016); Marx 200: a review of Marx’s economics (2018): and jointly with Guglielmo Carchedi as editors of World in Crisis (2018). He has published numerous papers in various academic economic journals and articles in leftist publications.
He blogs at

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