The theme of these hours is the bankruptcy of the Silicon Valley Bank, an institute specialized in providing services to American start-ups.
Given that the news is evolving in these hours, this article of mine was not created to offer a current picture but to explain in simple words to the readers of Affari Miei what is happening.
This page will be enriched and updated as we learn more details, I suggest you save it so you always have a point of reference in case (I don’t hope so) the situation gets worse.
In exposing the facts, I will greatly simplify some concepts for the sole purpose of making them usable to those who know little about these topics and, suddenly, have seen or will see themselves buried by the alarmed headlines of the newspapers.
Let’s start.
This article talks about:
Who is SVB – Silicon Valley Bank
The institute is relatively young – it was founded about 40 years ago – as its history coincides with the rise of the California start-up world.
Before last week’s bankruptcy it was the sixteenth largest bank in the United States: not a top player but not a negligible player either, especially if we consider the clientele.
In fact, SVB had conquered a very important slice of the market over time: start-ups and venture capital funds, that is, the whole world linked to technology and innovation that has changed the world in the last decade.
Either way, the SVB bankruptcy is the second-largest in US history, and the Signature Bank of New York bankruptcy being talked about as I write ranks close behind in third place.
Startups are a “peculiar” complicated customer
So far so good, one would say, if it weren’t for recent history that has changed too drastically. To understand it, we have to take a step back and go back to the post-pandemic period when, thanks to the expansive monetary policies of the Central Banks, there was a veritable flood of cheap money which caused the entire sector linked to the innovation.
Between 2020 and 2021 there were many IPOs, i.e. listings of new companies on the stock exchange, and in general the whole start-up segment went booming with billionaire collections and exponential company valuations.
All this flow of money went directly into the accounts of the companies that found SVB to be the best supplier ever.
The liquidity injection was unprecedented, which is why the bank’s coffers filled up.
What do banks do when we deposit our money? There are strict regulations on the destination of the funds, in a super simplified way we can say that the capitals are invested in safe assets to avoid problems in case they should be needed suddenly.
With the’rate increase by the Central Banks to counter inflation the scenario has radically changed.
Start-ups have had enormous difficulties in finding new capital, getting into debt has become particularly expensive and, consequently, the only source of survival has become cash.
I emphasize for those who don’t know these topics much: a start-up is, by its nature, a company that loses money in the first years of life. Every month he pays suppliers and salaries in the expectation of being able to produce profits with the product or service he is creating.
We could say, simplifying, that a start-up is a newborn child who needs care that can be bought with money.
If these become rare or expensive, as in our case, there is only one place to find them: in the cash register, i.e. the company safe, which was suitably filled in the previous two years with a more favorable scenario.
In this way, therefore, step by step, slow outflows began which then accentuated last week.
Mammamia… something was wrong!
Here we have to stop for a moment and rewind the tape to go back to a few lines ago: company coffers full, SVB with lots of money available.
The bank had the same problem that we, as investors, had a few years ago: yields on the bond market were very low, often negative, and to go into positive territory it was necessary to commit to long maturities.
The bank didn’t have many alternatives because, in fact, it couldn’t bet with customers’ money and, therefore, built a portfolio with long-term American bonds.
The FED’s policy change has drastically dropped the value of previously issued bonds which, banks usually know well unlike private savers, is a problem only from a market value point of view: waiting for maturity In fact, you get your money back without incurring losses.
The SVB, unlike other banks, had a particular clientele: the start-ups of which previously, precisely because of this change of scenery, had and need money.
At first the withdrawals were constant, then last week panic broke out because everyone in the environment started talking about the risks to which the bank was exposed.
Indeed, the SVB had to sell some positions realizing limited losses after all (we are talking about a few billion dollars) but then panic took over and requests for withdrawals arrived for tens of billions of dollars.
At that point, the intervention of the authorities was necessary because the situation was no longer manageable.
Stock plummeting, fear for the banking sector?
The news quickly reached the investors who sold the bank’s shares en masse, which went bankrupt in the following hours (the newspapers speak of bankruptcy, technically a procedure similar to “our” compulsory administrative liquidation is underway), and also the other bank shares they were infected by the sell-off dragging the markets down between Thursday and Friday.
The authorities intervene
The weekend was particularly challenging in the United States because in the meantime there were fears for other banks as well – in fact, as I write the news of the bankruptcy of Signature Bank of New York for similar reasons has also spread – and, in general, confidence was in question in the general banking system.
But why?
When we deposit money in the bank, whether we are individuals or companies, we are silently accepting a sort of “compromise”: the bank keeps it for us who obviously won’t all crowd the counter to collect it en masse.
This is because, trivially, we are all relatively calm in the fact that that money will be there forever and, above all, we accept that the bank is a safer place than our mattress to deposit money.
This is one of the basic principles on which the contemporary market economy has developed but it is good to explain it otherwise many steps escape us.
Returning to the United States, there is a guarantee similar to our Interbank Deposit Guarantee Fund equal to 250,000 dollars: given that we are talking about start-ups that have raised billions, we are really talking about pennies.
For this reason, the American authorities, after having “taken control” of the bank, have ensured that starting today (Monday 13 March) it will be possible to withdraw the money regularly.
“We take decisive action to protect the US economy by building confidence in our banking system.” they wrote in a statement from the US Treasury precisely to give a signal of easing to the market.
And now what happens?
This is the hyper-simplified explanation of what we know to date, in this final part I try to answer some questions that will surely dwell in the minds of readers.
- Are we facing a systemic collapse? – At the moment it is too early to say but we are sure of one thing: this is a “momento whathever it takes” for the American authorities. There is no market economy without banks and without the trust of companies and citizens in them: if this trust is lost, we enter a history-book scenario that we have never experienced as humanity ever since, in the Renaissance, someone in Italy came the idea of inventing the very concept of bank;
- Is this a new 2008? – Not really, there is a fundamental difference: in 2008 there were a series of abuses by the system, here at most there are negligence by the bank’s management;
- Could it be that the SVB did not anticipate that the historic era of low interest rates would sooner or later end? – Responsibilities will probably be sought right here probably. In addition, we must say that SVB had too sectoral customers and it is never a good thing, for any business, to have all customers of the same type: when things go well, in fact, we grow but if a sector goes into crisis, these are enormous problems and this is an example of lack of or insufficient customer diversification;
- But were the Authorities asleep? Where were they? – The general problem with regulation is that, however stringent, it can never always predict everything and often comes only after the omelette is done. In this case, however, there is a responsibility in the management of the matter by the American authorities who have in fact allowed a sort of exemption for “minor” banks with respect to the most stringent safety parameters valid worldwide. SVB and other “smaller” banks fell under this exemption;
- But is it also the fault of the Central Banks that have raised rates? – Probably in part yes, not due to the decision to raise rates but due to the late start of the maneuvers which required a more massive turnaround. Obviously speaking afterwards from our desk is simple, however this aspect must be underlined;
- Will the start-ups all fail and trigger an economic crisis? – I think it is too early to tell and the interventions of the American Authorities will go in this direction. It is no coincidence that I spoke of “whatever it takes moment” for the United States;
- Do we run a similar risk in Europe and in Italy? – At the moment it would seem not because more stringent regulations are in force. However we cannot make too clear predictions about it, in situations like these the psychology of the masses can move the balance in any direction. Surely the venture capital market will also be affected in Europe, we will see to what extent.
That’s it, for now.
In the next few hours this article will be updated as events evolve, I invite you to come back several times in case there are further news because we will promptly provide further explanations or practical reasoning.
See you soon.
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