SVB: How the drop could affect Brazil – 03/11/2023 – Vinicius Torres Freire

The collapse of the Silicon Valley Bank (SVB) was also bad news for Brazil, which was beginning to discuss lowering interest rates. Will the impact, so far very small, go away soon?

It could be a sour foam that dissipates within days. Further breaks of medium banks can sour the broth. Even if no more bankruptcies ensue, there could be an impact on economic confidence and further negative effects on the profitability of US banks. For an economy that grazes the risk of recession, it’s not good. But it was expected. High interest rates often cause accidents.

Until now, reasonable analysts do not believe in a relevant crisis. They could be wrong, which is not uncommon. However, the way in which the SVB went wrong suggests that the problem may be limited, even though many banks are losing money for the same reasons as their California counterpart.

SVB broke the old fashioned way. It did not sink because of complicated, crazy or fraudulent financial engineering, in a network, encouraged by the complicity of the regulation, supervision and risk assessment system, public and private, as in 2008.

The depositors of the SVB were startups and firms (“venture capital”) that invest in the development of these innovative companies, perhaps a future Google, as they like to say.

During the second wave of very low interest rates of this century, during the epidemic, startups raised a lot of capital, which they deposited at SVB, the sector’s traditional bank. Since the end of 2022, with the ebb of the “tech” mania and rising interest rates, companies have started to withdraw from the SVB or demand a higher yield for their deposits.

It doesn’t have to be a drama. But SVB’s customer base was not very diverse: affected by the same problem, at the same time. To make matters worse, the SVB kept more than half of its holdings, assets, invested in long-term government bonds (or bonds that yield mortgage payments, mortgages guaranteed by the government). Many American banks have assets of this type. But he didn’t put so many eggs in the same basket, he has income from other sources, a diverse customer base, etc. SVB was overkill on many fronts.

The bank bought the bonds when interest rates were very low (which means exactly that their prices were high). As interest rates rose, these bonds lost value. If he didn’t have to sell them, there would be no loss in practice (although the market value of these securities would be a sign of a problem in the balance sheet).

SVB had to sell in order to cover withdrawals. The loss, although relatively small, and the news that the bank would try to raise more capital (selling shares) unnerved depositors. A “venture capital” firm recommended that its partners, startups, withdraw from SVB. From Thursday to Friday, the bank lost a quarter of its deposits, say US media reports. End.

The size of the cap is still unknown. For now, those with more than US$250,000 in deposits (which are not covered by the guarantee fund, the vast majority of deposits) will have their money frozen. They cannot pay employees and suppliers. They may never see the color of part of the money again. Startups will fail. A large cryptocurrency firm with an SVB deposit (how ironic) is going to suffer.

Perhaps SVB will be sold to a bigger bank, a relief. People from the “tech” world are already asking for government help. Bidu.

The mistrust caused by the failure of the SVB could trigger runs against other small and medium-sized banks. Interest rates rose in the US (and here, by scale). American analysts themselves are unable to guess the size of the contagion. Here and abroad, we are going to have at least tense days.

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