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Investors brace for fallout from Silicon Valley Bank

BusinessEconomyInvestors brace for fallout from Silicon Valley Bank
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Editor’s note (March 12): Since this story was published, the Federal Reserve and Treasury have said that all depositors at the Silicon Valley bank will be fully protected.

It takes Turned the tide to find out who was swimming naked – and on March 10 a particularly big skinny-dipper was caught in the buff. Silicon Valley Bank (svb), was America’s 16th largest lender taken into receivership After a failed attempt by regulators to raise capital and a run on its deposits. As authorities frantically try to contain the crisis, jittery investors are on the lookout for more bare flesh.

When a bank collapses, concerns usually begin with other financial institutions, which may end up either because of connections to the collapsed institution, because they use similar business models, or simply because investors The feeling gets spoiled. In a panic, even small banks with strong businesses may lose depositors to larger, more closely regulated competitors. svbA failure to raise capital or sell itself to a larger organization has led to losses in regional bank shares, which fell nearly a fifth last week. The share price of First Republic Bank, another San Francisco-based lender, fell 34% over the same period.

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With over $200bn in assets at the end of 2022, svb There is a dearth of institutions such as Bank of America or Morgan Stanley, which are known globally as systemically important banks with trillions of dollars in assets. svb It also had the highest proportion of corporate deposits among US banks, which are more volatile than retail ones, and a lot of loans and bonds relative to deposits. The rapid rise in interest rates thus hit the bank hard. Michael Semblest of JP Morgan Asset Management notes that svb The term was in a “world of its own” in terms of risk – rising rates at risk for its portfolio.

There were limited signs of a wider crisis in the US financial system when markets closed on March 10. credit-default swaps on loans from regional lenders are uncommon or illiquid; Were under those major institutions. Five-year swaps on debt issued by Morgan Stanley ticked up from 78 to 96 basis points last week, with a higher value meaning a higher cost to insure against default. But the same instrument reached a high of 139 as recently as October, and 1,300 basis points during the worst global financial crisis of 2007-09.

The second occasion for distress is found among the bank’s corporate depositors. Fully 93% of bank deposits are not covered by federal insurance, which applies only to those with less than $250,000. The immediate losses will be concentrated in tech firms. svb Specialized in lending to asset- and income-light startups. Despite its modest size relative to US megabanks, svb claimed it worked with nearly half of US venture-backed tech and life-sciences firms last year. As long as deposits are unavailable, immediate outlays such as loan repayments and payroll remain at risk.

A hit to the sector could mean a period of jittery and risk-averse behavior from tech firms and investors. Streaming-hardware company Roku reported it had $487 million in the bank in a March 10 regulatory filing. neither are svbIts activities are geographically concentrated as its name suggests. The company’s international depositor base has not been disclosed, but it has a presence in the UK, China, Germany and India, among other countries. On 10 March the Bank of England sought to put the British branch of the bank into insolvency process.

The spillovers are already evident in the cryptocurrency markets. value of USDCThe , a stablecoin that is meant to be linked to the value of the dollar, fell as low as $0.88 on March 11. Circle, the payments firm that manages USDCconfirmed that about $3.3bn of its $40bn reserves had been deposited svb, as investors fled USDCThey piled into Tether, another stablecoin, which rose to $1.03 against the dollar.

The last occasion for the crisis concerns the assets of a failing institution. Selling complex structured products suddenly in illiquid markets can cause prices to collapse, weakening the balance sheets of other financial institutions. is less likely to be true svbIn the case of, since more than 60% of the company’s reported assets are held in US government bonds, or cash – both are extremely liquid markets. Nevertheless, the downturn will focus on firms and organizations with similar portfolios. These include some of the largest financial institutions in Asia. Japanese and Taiwanese insurance companies hold hundreds of billions of dollars in foreign bonds.

there are three options for svb: Bailment, sale or liquidation. Despite nervous demands for help from a handful of Silicon Valley veterans, the politics of a government rescue look difficult. On March 12, US Treasury Secretary Janet Yellen said that while officials were concerned about depositors, there would be no bail-out for investors and owners. The Dodd-Frank Act, the centerpiece of bank regulation enacted after the global financial crisis, prohibited taxpayer-funded bail-outs for individual firms.

As per media reports, the regulators had launched an auction for SVB on the evening of March 11, which is expected to conclude by the evening of March 12, with or without a deal. When the bank was up and running, there were few institutions that could buy it. US regulations prohibit mergers that create an entity with more than 10% of US deposits, which the country’s largest lenders: Bank of America, JPMorgan and Wells Fargo refuse as buyers. But that restriction is no longer prohibitive svb is in receivership. A buyer may find this an attractive prospect for securing relationships. svb Same with everyone in Silicon Valley.

A statement published March 11 by hundreds of venture-capital firms expressing their support for the bank may help. A sale will depend on a potential buyer’s degree of comfort with the price. svbproperty of. Valuation losses in its bond portfolio should be fairly easy, but svb managed to manage a lot of debt—$74bn—worth it by the end of 2022. svb Thinks these are high quality. It only holds $636m in reserve for losses, less than 1%. Outsiders may disagree.

Without a bail-out or sale, a liquidation would proceed. That process will be further simplified by the relative liquidity of svb, meaning that depositors could have some percentage of their uninsured money back soon, even though their total losses are still unknown. depending on how the cards fall svbIts clients and counterparties will be a major test of the US regulatory system – perhaps the biggest since the global financial crisis.

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