SILICON VALLEY BANK Crisis Explained & Impact on Sectors
SVB’s downfall is snowballing and if you aspire to build your career in banking and financial services you’ll need to understand it from a few key angles.
This isn’t about appearing well-informed in interviews alone. It’s being touted as a slow rolling crisis for the US financial system given the flouting of risk management best practices, the impact on startups and ripple effect on global equity markets
A key lender to Silicon Valley tech startups, SVB’s business focuses on venture capital and private equity firms along with offering private banking solutions to HNWs. With a $200bn+ AUM, deposits tripling from 2019 to 2021, SVB seemed untouchable. Here’s where the problem started:
✅ When clients deposit money in banks, it’s a liability that the bank “owes” them plus the interest that they offer. Banks convert these into assets via products like mortgages and securities.
✅ With massive deposits coming in from clients like VCs, SVB bought long-dated US government treasuries and Mortgage backed securities (MBS) at low interest rate. With the Fed hiked rates during COVID to tame inflation, SVB’s bond portfolio nosedived since bonds have an inverse relationship with interest rates- when rates rise, bond prices fall.
✅ SVB’s 78% allocation in MBS, is the highest as compared to other Banks which have 30%-40% allocation. Its interest rate risk exposure was massive. Its Investment portfolio was 57% of the total assets (2.5x as compared to other US banks who have 24% as investment portfolio of total assets). They didn’t hedge their duration risk which banks typically do with Interest rate swaps (IRS).
✅ SVB's announcement on March 8 for $1.75bn capital raising triggered the depositors' "bank run" to attempt withdrawing $42 bn, leaving SVB with negative cash balance.
✅ Banks like HSBC have confirmed to acquire the UK arm of the failed U.S. bank in a private sale, saving 6.7 billion pounds in deposits. Players like JP Morgan and Middle East Bank are also swooping in as interested buyers which may eventually prevent the “next financial crisis” situation from happening.
Fallout & Implications:
🎯 SVB collapse followed by Signature Bank closure, will hit bond yield, especially in treasuries badly. Although the U.S. government assurance may guarantee customers getting 100% of their deposits back, several long investment products would still suffer a major impact.
🎯The US IPO and equity markets would be the worst hit since banks reporting collapse were startup lenders, thus impacting their cash flows for the near term, forcing IPO delays.
🎯 SVB avoided regulatory scrutiny to run their risk business model of funding startups (Fed relaxes the full Basel III NSFR & LCR requirements on banks with AUM under $250 bn).
🎯Forex market investors with position in dollar may suffer with USD tanking. Bond market investors would be affected by this banking crisis.
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