Banking Crisis Deep Dive

   

Intro

It all started with Silicon Valley Bank, a firm that made its name lending to risky startups, succumbing to high-interest rates and failing on March 10th. 

The catastrophic ripple effect of SVB's struggles engulfed the entire banking industry, and banking stocks nose-dived with investors losing faith in the sector.

Signature Bank was swiftly forced to shut down just two days after SVB on March 12th. And the damage didn't stop there - Credit Suisse and First Republic were also hit hard by liquidity concerns. On March 16th, both banks received multi-billion dollar rescue packages just to stay afloat. 

The massive influx of emergency cash may have placated some investors, but markets are still on edge, and there’s a lot still to come. But one thing’s for sure - don’t sleep on the impact even regional banks can make in causing a potential global banking crisis.

  

SVB Overview

Silicon Valley Bank (“SVB”) was founded in 1983 and quickly became a financial powerhouse. SVB built a reputation for lending to the early-stage startups that were deemed to be ‘too risky’ by traditional banks. 

SVB may not have been a household name, but the bank was a crucial lifeline for early-stage startups. About 45% of US venture-backed tech and life sciences companies banked with SVB at the time of its collapse. The bank grew into one of the top 20 commercial banks in the United States, managing $209 billion in total assets at the end of 2022.

But it’s not just early-stage companies that bank with SVB. Roku and Shopify were both big-time clients, as were many private equity venture capital firms.

   

Tis' Bank Run Season

Silicon Valley Bank had an eventful 5-year run prior to its failure. In 2018, SVB acquired Leerink Partners, an elite boutique that specializes in early-stage biotech and life sciences companies, solidifying SVB's position as the premier bank for high-risk, high-reward ventures.

When the Fed slashed interest rates during lockdowns, the tech sector boomed - startups and investors flocked to SVB. The bank’s customer deposits grew from $62 billion in 2019 to $190 billion in 2021.

SVB, like other banks, has a tried-and-tested method of making money - by holding customers' deposits and lending them out to borrowers. However, SVB wanted to grow faster, and so it turned to the bond market. 

SVB’s deposits almost tripled in the span of two-years. In search for yield SVB put a large portion of its deposits in bonds. But the higher the risk, the higher the reward, and SVB found out the hard way.

With around $80 billion invested in mortgage-backed securities and low-interest rate bonds (SVB bonds yielded under ~1.8%), SVB was living the dream.

But that dream turned into a nightmare when the Fed started raising interest rates in 2022 - risk-free treasuries started to yield nearly 5%. 

Suddenly, SVB's investments with lower payouts lost value, and the bank had to take an unrealized loss on paper.

But this isn't just SVB's problem. 

In fact, most banks have unrealized losses from declining bond prices. According to the FDIC, banks are sitting on a staggering $620 billion of unrealized losses. But unrealized losses on paper aren’t inherently problematic. Banks only run into issues with unrealized losses when they need to sell off their assets to cover deposit withdrawals.

SVB may have been doing exactly what its peers were. But it may have taken a post from a relatively obscure venture capital newsletter to send the house of cards flying.

   

Did a Finance Newsletter Cause the Bank Run?

In the weeks leading up to SVB's failure, investors started to pull back the hood and keep a close eye on the bank’s financials. A writer by the name of Byrne Hobart was one of the first to sound the alarm. He tweeted on February 23rd that the bank was leveraged at a staggering 185:1 ratio - essentially rendering it insolvent. 

Though his newsletter, The Diff, may not be as well-known as mainstream publications like the Wall Street Journal or Bloomberg, it commands an audience of over 50k, including many venture capitalists and buy-side investors.

Word got around the finance industry that SVB was grappling with inflationary pressures. But panic truly set in on March 8th when the bank made a stunning announcement: in an effort to prop up its liquidity claims, it would sell a whopping $1.25 billion in stock. Adding insult to injury, SVB revealed it had sustained a crushing $1.8 billion net loss in the first quarter alone, after being forced to sell off $21 billion in bonds at a significant loss. 

Now investors like Peter Thiel began sounding the alarm, urging portfolio companies to withdraw their funds. This sparked a frenzy on Tech and Finance Twitter, leading to a full-blown bank run that caused SVB's share price to plummet over 60% the next day.

The situation grew so dire that trading in the bank's shares had to be halted, and desperate attempts to raise capital or find a buyer were abandoned. The bank was ultimately shut down by California regulators and placed in receivership under the Federal Deposit Insurance Corporation.

It didn’t stop there…

   

Signature & First Republic

On March 12th, New York regulators shut down Signature Bank, citing systematic risk. Signature Bank is crypto-focused and regulators wanted to stave off a larger crisis and prevent a bank run. 

During the week of March 13th, First Republic’s shares fell over 60%. Investors worried that First Republic’s clients could start a bank run. Like SVB, most of First Republic’s deposits are uninsured. First Republic and SVB were frequently compared as peer institutions, and both banks’ depositors started to panic.

Ultimately, a cohort of Wall Street banks led by JPMorgan announced a $30 billion rescue package for First Republic on Thursday March 16th, but some analysts don’t think that’s enough to save the bank. 

   

Credit Sus

Credit Suisse, once a financial powerhouse, found itself in dire straits as a result of the SVB contagion. Credit Suisse used to be one of the mightiest banks in the world. But the bank has had a rough go of it over the past decade with a series of scandals, missteps, and compliance failures with Bill Hwang being the pick of the lot in 2021.

Credit Suisse’s scandals have eroded the confidence of both investors and clients, with its stock value plummeting by over 70% in the past 12 months. 

On Wednesday March 15th, Credit Suisse’s largest investor, the Saudi National Bank, said it couldn’t provide any more assistance to CS due to regulatory hurdles. Credit Suisse’s shares fell over 30% on the news.

Credit Suisse was forced to turn to the Swiss National Bank for a lifeline. The Swiss National Bank stepped in and offered to lend up to $54 billion to Credit Suisse. But analysts suggested that may not be enough to revive the bank's fortunes.

In stepped UBS, Credit Suisse’s arch-rival, also a Swiss heavyweight bank. UBS bought Credit Suisse for $3.3 billion on March 19th, a 99% decline in price-per-share from Credit Suisse’s all-time high (lol).

But UBS wasn’t prepared to absorb the likely billions of dollars on Credit Suisse’s balance sheet. To get the deal done, the Swiss National Bank committed over $100 billion of liquidity assistance and provide UBS with a $10 billion guarantee for potential losses.

   

Takeaways

1. The Fed Giveth, The Fed Taketh

The Fed’s strategy became a double-edged sword for SVB. During the pandemic recovery, the Fed slashed interest rates close to zero, and SVB received an influx of deposits as venture capital firms were eager to make investments.

But in 2022, higher interest rates caused VC funding to dry up, and SVB’s deposits dwindled. And SVB and most other banks had to write off billions of dollars in unrealized losses.

SVB’s customer base coupled with an overabundance of investment in long-dated treasuries that lost value due to interest rate hikes, creating a perfect storm of financial instability.

2. Bank Runs are… Fast

There’s no doubt SVB could have done some things differently to prevent its failure. But social media played a big role in the bank run.

When Peter Thiel advised venture capital firms to withdraw money from SVB - news spread like wildfire. FinTwit also had a field day and memed SVB out of existence. 

In today’s day and age, fear can go viral, and in SVB’s case, it didn’t take long for word to spread.

3. The World is More Connected than You Think

SVB’s collapse sent ripple effects throughout the entire economy. Even the largest banks in the world can be shook by regional banks collapsing on different continents. 

Credit Suisse has long been considered one of the thirty or so banks deemed integral to the global economy. After a rough year, it was ultimately chaos from smaller American banks that led to the UBS-Credit Suisse deal.

In any case, the banking saga is far from over but you can bank on us to keep you posted with the best news, analysis and memes.

   

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