![]() ![]() Within a few days, customers yanked more than US$40-billion from SVB. When SVB clients learned through social media that their beloved bank was shovelling cash out the door, they panicked. SVB’s deposit base shrank massively last year and, to cover the outflow, the bank had to sell its fixed-rate securities at a loss – when interest rates rise, the prices of fixed-rate bonds fall. When they did, the cash flowing into startups slowed, so they had to withdraw their deposits from SVB to pay their operating expenses. The formula worked well until central banks jacked up interest rates to fight high inflation. So SVB opted instead for longer-dated Treasury bonds and mortgage-backed securities. But those short-term securities paid almost nothing in a zero-interest-rate market. As Megan Greene, chief economist for the Kroll Institute, pointed out, SVB could have ploughed the deposits into Treasury bills. SVB had been taking in gushers of cash as its clients raised a lot of money in a tech-worshipping environment through initial public offerings, venture-capital investments and the like. The answer was a funding model whose fatal flaw was revealed when interest rates rose, hitting the bank like a precision bomb. Europe really had no equivalent, though in a sense Italy’s Mediobanca, the investment bank that exploited connections and influence to build an empire linking many of the country’s top businesses, came close, conceptually speaking, It supplied mortgages to rich Silicon Valley entrepreneurs and expanded overseas to fund the hot tech markets in India, Israel and Britain. government and went on to become the tech bros’ plaything, picking up clients in life sciences, venture capital, private equity, even the premium wine market. It survived the 2007-08 financial crisis with a little help from the U.S. In effect, SVB became the captive bank of Silicon Valley and thrived, boasting clients such as Cisco Systems and Bay Networks. It was a good idea, since mainstream banks had little expertise in tech and naturally avoided small companies with little or no revenue stream, zero profits and scant collateral to back loans. SVB was launched in 1983 to focus on tech startups in the San Francisco Bay area. Silicon Valley Bank collapse: What’s next for banks and investors? And it exposed the epically bad management and risk-taking skills of the bros who ran the bank – into the ground. It exposed the hypocrisy of the tech bros, many of whom called for a full bank bailout, blowing a hole in their libertarian mantra. If little else, the collapse of SVB stands out for sheer entertainment value. Still, the herd mentality prevailed Wednesday. But CS’s woes do not appear to reflect interest-rate problems that the wider banking system can’t handle. The new banking crisis was across the Atlantic, where a capital-raising and liquidity nightmare at Credit Suisse, a long-time basket case, triggered a broad sell-off of big-bank shares in Europe and elsewhere. SVB’s contagion seemed largely boxed in, in good part because Uncle Sam insured all of the bank’s deposits. On Tuesday, regional banking shares recovered much of their lost ground, and even Bitcoin soared. Less than a week later, the prophesied calamities didn’t happen, even if investors’ nerves had been rattled. Cue the hysterics over one fatal bank run triggering a wave of others, California’s tech sector melting down and America losing its world-beating competitive edge in everything from smartphones to flying taxis. ![]() Silicon Valley Bank imploded last Friday and was seized by a U.S. ![]()
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