1. What kind of business does Silicon Valley Bank do?
The bank’s business model has its roots in the ecosystem of tech startups and investment funds venture capital which supported its growth, a development that has exploded in recent years.
Over the past four years, the Californian bank has grown exponentially, as has the technology sector it financed: deposits have risen by 200% to a peak of 220 billion dollars. By way of comparison, those of JP Morgan, one of the American Big Four, have increased by around 50% in the same period. «Svb was effectively concentrated on a single sector and a single geographical district, that of innovative Californian companies, a model that in fact does not exist in Europe», says Stefano Caselli, dean at Sda Bocconi.
2. What triggered the crisis?
The surge in liabilities (such as deposits and funding) prompted the SVB to seek higher yields in years when yields were very low, investing in securities with longer maturities – above 5 years – such as bonds. «With the rapid change of course of monetary policy in the USA and the consequent increase in interest rates – explains Giovanni Sabatini, director general of the ABI – a misalignment has arisen between the duration of short-term deposits and the securities portfolio with long durations and at a fixed rate, and whose value has fallen as a result of the rise in interest rates. Up to that moment, that is until no one began to withdraw the deposits, the mismatch seemed manageable for the Svb”.
3. What prompted clients to withdraw their funds?
«Innovative companies have a strong absorption of cash because they invest a lot – Sabatini explains – and the rise in interest rates has made it more expensive to finance themselves. Hence the rush by startups to withdraw their deposits, together with the spread of fears about the stability of the bank”. The result is the “bank run”, i.e. the outflow of deposits, typical of financial crises.
4. Why was Svb unable to return the deposits?
The institution did not have an adequate liquidity buffer.
5. Why did it not have adequate liquidity?
This is where the rules for the banking sector come into play. «The Basel 3 framework provides for two fundamental indices for banks – says Sabatini -, in addition to that of capital solidity, known as the Cet1 ratio. The rules for the banking system also provide for a liquidity index, the liquidity coverage ratio and the net stable funding ratio that institutions must respect. And they must have a value greater than 100. When Basel 3 was adopted, the US chose to exempt some banks from adopting these ratios which are instead respected by the large US institutions, which do not appear to be impacted by this affair.
6. What do these indices measure?
The first is a short-term index and indicates for how many days a bank can cover liquidity requirements with its reserves. The second measures the ability to balance assets and liabilities.
7. Could a case like this happen in Italy?
The belief is that something similar cannot happen because the banks strictly observe the rules of Basel 3. In Italy the liquidity coverage ratio is 160% while the net stable funding ratio it is 130%, well above the 100% required, says the ABI. In general, European banks have 3 trillion of excess liquidity, equal to a quarter of deposits.