Silicon Valley Bank: Understand bankruptcy and its effects – 03/13/2023 – Market

In the United States and in the world, this week began under the impacts of the collapse of SVB (Silicon Valley Bank). Last Friday (10), the 16th largest American bank, with US$ 209 billion in assets, went bankrupt and passed into the control of regulatory bodies in the country.

The SVB bankruptcy is the biggest for the American banking industry since the 2008 financial crisis.

The weekend was marked by the announcement of a rescue package by the US authorities, but there are still a number of outstanding issues, including finding a buyer for the financial institution.

Amid billionaire bank losses, the market revised its expectations for the interest rate. Agents started to bet that the Fed (the country’s central bank) will pause following increases due to stress in the system, which could also impact interest rates in Brazil.

Understand what led to the collapse of the SVB and the main consequences for the global economy so far.

What is SVB?

Silicon Valley Bank was founded 40 years ago in Silicon Valley, a global technology hub located in California (USA), and has become a solution for startups. These start-ups need cash to grow, but they struggle to get credit from larger financial institutions. SVB grabbed a big chunk of that market and became the 16th largest bank in the US.

Why did the institution fail?

The years 2020 and 2021, at the height of the Covid-19 pandemic, were marked by virtually zero interest rates in the US, which drives investors to seek risk assets. This increased investment in startups and leveraged the growth of SVB itself. Bank deposits increased by 86% in 2021.

The game began to turn around last year, when the Fed started raising interest rates to try to control the highest inflation recorded in the US in 40 years. As a result, investors left startups aside and prioritized government bonds, which are safer and now have a higher yield.

In order to maintain their operations, the companies began to withdraw what they had in the SVB and left the bank in a delicate situation.

This is because the institution had bet heavily on long-term bonds. They were considered safe at the height of the tech boom, but as interest rates soar, they are now worth $15 billion less than when SVB bought them. To compensate for the withdrawals, the bank sold part of these securities even with a billionaire loss last Wednesday (8).

In an attempt to recover losses, the institution announced that it would issue shares, which made the shares plummet 60% on Thursday (9).

The bankruptcy was consummated on Friday (10), when startups and funds rushed to get more money out of the bank, and requests totaled US$ 42 billion. Thus, the regulatory bodies of the US financial system decided to take control of the SVB.

What were the first impacts of bankruptcy on the financial market?

SVB is not a large bank. By comparison, he controlled $209 billion in assets, while the largest company in the industry, JPMorgan Chase, controls more than $3 trillion.

The biggest concern for the financial system is the possibility that customers of other banks, especially regional ones, would also rush to withdraw their deposits, which would generate a cascading effect. On Sunday, the New York bank Signature, which has law firms as clients, had its bankruptcy announced.

The moves have led to a loss of more than $100 billion in market value by US banks in recent days.

This Monday (13), shares of financial institutions fell sharply around the world, and prices of US government bonds soared.

How did US officials react to the collapse?

On Sunday (12), the United States announced that all Silicon Valley Bank and Signature customers will be able to withdraw their deposits in full — there was concern because the resources are covered by the federal insurer up to the amount of US$ 250 thousand, that is, there was no guarantee that customers holding a balance above that amount would be reimbursed.

The Fed also announced the creation of an emergency program for financial institutions, ensuring they can meet customers’ withdrawal needs. The $25 billion program will offer one-year loans to banks, credit unions and other eligible institutions.

US President Joe Biden praised the measures on Sunday and said he was “firmly committed to holding those responsible for this mess accountable and continuing our efforts to strengthen the monitoring and regulation of larger banks”.

On Monday, Biden tried to assure Americans that the banking system is safe and that their deposits will be available “when they need it.”

The plan sparked a wave of relief in Silicon Valley, but there are still questions about the country’s startup funding environment — and about 90% of the institution’s clients have deposits above the government’s insurance limit of $250,000. . Furthermore, the SVB has yet to find a buyer.

Major cryptocurrencies have stabilized. USD Coin, also known as USDC, has rebounded to $0.99, up from an all-time low of $0.87 hit on Saturday. The intended target against the dollar is 1:1. The drop was sparked by concerns about Circle, the company issuing the stablecoin, being exposed to the SVB.

What are the prospects for interest rates in the US and Brazil?

The SVB bankruptcy has led fund managers to increase bets that the Fed will leave interest rates unchanged (between 4.5% and 4.75% a year) at the next monetary policy meeting, scheduled for this month. The aim would be to stabilize the global financial system. Last week, markets braced for another 0.5 percentage point rise.

“The SVB situation is a reminder that the Fed’s hikes are having an effect, even as the economy has resisted thus far,” said Mark Haefele, chief investment officer at UBS Global Wealth Management.

This Monday, there was a drop in interest rates negotiated in the American and Brazilian markets. Expectations for US interest rates at the end of 2023 dropped from approximately 5.5% to around 4.5% per annum.

The yield curve in Brazil already indicated a bet on a cut in the basic rate at the Central Bank’s Copom (Monetary Policy Committee) meeting at the end of June. The expectation was that the BC would still keep the Selic at the current 13.75% per annum in the two meetings until then, in March and May. Now, it has upped the ante on an anticipation of that cut.

How has the Brazilian government reacted to the crisis?

The Minister of Finance, Fernando Haddad, said this Monday that the government was still evaluating whether the BC will have to take any action.

While acknowledging the seriousness of the situation, Haddad said that “apparently” the episode will not trigger a systemic crisis. The minister, however, recognizes that it is still not possible to estimate the size of the problem.

“The Fed’s action over the weekend was positive, guaranteeing depositors. This is the first measure that the monetary authority has to avoid a bank run”, said the minister.