The authorized biographers of the bankruptcy of Silicon Valley Bank (SVB Financial) have given an official advance on Wednesday about what happened three weeks ago, which will reflect the comprehensive report that they will publish before May. Both the chairman of the Federal Deposit Insurance Corporation (FDIC), Martin J. Gruenberg, and the vice president of supervision of the Fed, Michael Barr, have shaped the main axes of the biggest bank failure since 2008, but with some details very different from other cases that dynamited the Californian bank in just 24 hours, according to the testimony of both regulators.
What was new about the collapse was the speed at which it occurred. In a statement on Capitol Hill, Barr revealed that up to 85% of the SVB’s deposit base attempted the stampede from Thursday, March 9 to Friday, March 10. “As of Thursday morning, I had no news of a deposit leak in the Depositors withdrew at an extraordinary rate, taking more than $40 billion in funds out of the bank on Thursday, March 9. Late night and Friday morning, the bank announced that even larger outflows were expected that day. it had enough cash or collateral to meet these extraordinary and rapid outflows, and on Friday, March 10, SVB went bankrupt,” he testified before the congressional committee that analyzes recent banking events.
The sixteenth bank in the US managed at the end of 2022 just over 175,000 million euros of liabilities from its clients. Therefore, the aforementioned 85% of deposit outflows in 24 hours projects a figure of more than 6,000 million per hour trying to escape the bank through orders at the branch, telephone banking and online banking of the SVB. Is it a lot or a little? For example, the entire banking system in Spain had a lower rate for an entire month than in a single hour of the SVB. Barr attributes the speed of the event to the spread of the banking panic in conversations on social networks and left the question of its origin unresolved, although he recalled that the investigation is ongoing.
The cost for the US Deposit Guarantee Fund to cover the collapse of Silicon Valley Bank already increases by about 20,000 million dollars
A case of mismanagement
“For starters, SVB’s bankruptcy is a classic case of mismanagement. The bank had a concentrated business model, catering to the technology and venture capital sector. It also grew extremely fast, tripling asset sizes between 2022 and ” , explained Barr, appointed by the president of the Federal Reserve (Fed), Jerome Powell, as the person in charge of investigating the case. During his testimony, the official explained that during the initial phase of the pandemic (2020) and in the heat of increased operations in the technology sector with continuous corporate and financing rounds, the SVB experienced “a significant number of deposits”, but the The bank invested this client liability in long-term securities such as public debt “to boost performance and increase its profits.”
But then, the macroeconomic scenario changed completely, but the bank hardly changed its liquidity management policy, thinking that this flow of money from its clients was always going to be incoming and not outgoing. From the end of November 2021 and until March 2022, the Fed began to give signals that it was going to start raising interest rates from the 0% zone due to the intense inflation that was brewing during 2021. In March 2022 It undertook its first rate increase since 2018 and on March 22, with the SVB already buried as a bank, the ninth rose to reach 5%.
The consequence of the cycle of rising interest rates was the increase in debt yields in the markets due to the fall in price, which moves inversely to yield. In other words: fixed income assets depreciate but if they are held to maturity, the capital is preserved. The Fed senior official recalls that he had a meeting in February about the impact of the rate cycle on the financial situation of some banks and the approach of officials to address the problem. “There was a lot of discussion on the topic, highlighting SVB’s interest rates and liquidity risk in particular. Officials conveyed that they were actively engaged with SVB but, as it turned out, the full extent of the bank’s vulnerability was not apparent. until the unexpected bank run on March 9,” Barr said.
85% of deposit outflows in 24 hours project a figure of more than 6,000 million dollars per hour trying to escape from the bank
The trigger for the 9-M panic
“However, the bank did not effectively manage the interest rate risk of those securities or develop effective modeling tools and metrics to measure interest rate risk,” Barr told lawmakers. Silicon Valley Bank was already on the radar of regulators since late 2021 for “deficiencies” related to “ineffective board oversight, risk control and internal audit.” The Federal Reserve alleges that the bank, due to its size, did not pass the financial stress tests that the largest entities did face and that the SVB probably raised the alarms in time to avoid the tragedy.
Barr’s story recalls that on Wednesday, March 8, SVB announced that it had recorded a loss of $1.8 billion from the sale of its bond portfolio. The entity took it for granted that with the divestment it would solve its need for liquidity and the equity impact would cover it with a capital increase. Both the first and second operations were led by Goldman Sachs. “Uninsured depositors interpreted these moves as a sign that the bank was in danger. They turned their attention to the bank’s balance sheet and didn’t like what they saw. The bank waited too long to address its problems and, paradoxically, the late actions that finally took to strengthen its balance sheet caused the ‘bankrun’ (banking panic) of uninsured depositors (above $250,000) that led to the bankruptcy of the bank”, concluded Barr.
A ransom of 22,500 million
For his part, the president of the FDIC, Martin Gruenberg, advanced in responses to congressmen that the cost for the Deposit Guarantee Fund to cover the collapse of Silicon Valley Bank already increased by about 20,000 million dollars, including the 18,000 million destined to redeem deposits above the $250,000 legal limit. In addition, the senior official said the Signature Bank bailout will affect an additional $2.5 billion, including $1.6 billion for regular uninsured deposits. “It would be long since these estimates are subject to significant uncertainty and are likely to change, depending on the final value obtained from each judicial administration mandate,” he said while recalling: “It is worth noting that these two instruments were allowed” Shareholders lost their investment. Unsecured creditors suffered losses. The most important boards and executives were fired.”
