The sudden collapse of Silicon Valley Bank on March 10 sent depositors into panic at many banks, large and small.
Is the banking crisis that started last month over?
Is it almost over or is it just the beginning?
Opinions differ.
On March 10, regulators abruptly shut down Silicon Valley Bank to prevent the Californian bank’s woes from spreading to the entire banking sector.
Santa Clara, California-based SVB was the go-to lender for many tech companies. He provided specialized financial services, industry expertise, a valuable network and a strong reputation. It also offered a range of financial services, specifically tailored to the needs of start-ups, such as venture debt, corporate banking, and asset management. These services are designed to help start-ups manage their finances, optimize their cash flow, and scale their businesses.
Created in 1983, Silicon Valley Bank (BLIMS) – Get a free reportBilling itself as a “partner for the innovation economy,” it offered higher interest rates on deposits than its larger rivals to attract customers. The company then invested its clients’ money in long-term Treasury bonds and mortgage bonds with strong yields.
The main problem
This strategy had worked well in recent years. The bank’s deposits doubled to $102 billion at the end of 2020 from $49 billion in 2018. In 2022, deposits increased to $189.2 billion.
But everything turned upside down when the Federal Reserve started raising interest rates, making the existing bonds held by SVB less valuable. As a result, the bank had to sell the bonds at a discount to cover its customers’ withdrawals. By selling these bond positions, SVB had to take a significant loss of $1.8 billion.
Due to this loss, SVB suddenly announced that it needed to raise additional capital of $2.25 billion by issuing new common and convertible preferred shares. This decision caused panic and a bank run.
Since then, fears of the domino effect have spread like wildfire, threatening the banking sector, even though too-big-to-fail banks have been subject to strict regulations since the 2008 financial crisis.
In addition to SVB, contagion fears have already led to the closure of Signature Bank in New York (sbny) – Get a free reporton March 12. Since then, concerns about deposits at other small banks—that is, those with assets below $250 billion—have intensified, particularly as the FDIC guarantees deposits that are less than or equal to to $250,000 only. Basically, everyone with more than $250,000 in their accounts would lose anything over the FDIC threshold if the bank defaulted.
Despite regulatory assurances and declarations about the soundness of the US banking system, depositors have rushed in recent weeks to withdraw their money. According to Federal Reserve data, Americans withdrew $120 billion in deposits from small banks during the week ending March 15.
Small bank deposits stabilized in the week ending March 22. However, deposits at smaller banks are still down about $216 billion during the week ending March 22 from a December high.
‘This trend will accelerate’
Large US banks lost $96.2 billion in deposits in the week ending March 22, Fed data showed. Several analysts attributed this decline to depositors moving their cash into higher-yielding money market funds.
It is against this backdrop that Elon Musk, the CEO of Tesla and owner of Twitter and former co-founder of PayPal, has just warned of a silent bank run that could accelerate. This warning came during a thread on Twitter. One account, with which the billionaire regularly interacts, posted a message saying that US banks continue to face massive withdrawals of funds from their customers.
“Trillions of $$$ are being drained from the banks…into money market funds. That weakens the banks,” the Twitter account wrote on April 7.
He continued: “Fear that banks are at risk is driving this trend and therefore further weakening banks.”
Moving cash from bank accounts to money market funds is a trend explained by the fact that these short-term investments offer higher returns than traditional bank accounts. However, the depletion of bank deposits can lead a bank into a liquidity crisis, similar to what happened with SVB.
Musk seems to share this point of view. He even believes that this phenomenon will accelerate. Basically, things are going to go from bad to worse.
“This trend will accelerate,” the billionaire said, without elaborating.
On the other hand, the big banks have a more positive outlook. Jamie Dimon, CEO of JPMorgan Chase, said so. In an interview with CNN on April 6, he said the banking crisis was almost over.
Could there be more bank failures? “I don’t know,” Dimon told CNN on April 6. “But if there are, honestly, they will be resolved. I think we are nearing the end of this particular crisis.”
The banker also reiterated that the problems that led to SVB’s bankruptcy were “hiding in plain sight” and should have been detected by the bank’s management.
