It all started with the threat of a downgrade. Just days before the collapse, Silicon Valley Bank’s concerns were directed towards the rating agencies. A negative judgment would have weighed on the confidence of investors and customers: for this reason the executives had relied on a plan prepared by one of the leaders of global finance, Goldman Sachs. The goal, for the reference institute for Californian start-ups, was to overcome a momentary problem, due to the rise in interest rates, in the best possible way. No one seemed to have foreseen the storm that would come.
Not even the Moody’s agency, which seemed to have welcomed the first steps of the plan drawn up in the previous weeks, with the announcement of a capital increase accompanied by the recognition of almost 2 billion in investment losses. The rating cut was only one “notch” as SVB executives had hoped, according to Reuters.
However, the reaction of the markets and customers was missing, who had already started moving their deposits elsewhere for weeks. It was precisely those investors who had led the exodus who had made the bank a reference for Silicon Valley, on which almost half of all US start-ups financed by venture capital funds depended.
The devil is in the details
The concerns of funds such as that of Peter Thiel, known as co-founder of PayPal and Facebook investor, were linked to the stability of the institution, which in a few years has become the sixteenth in the United States. A growth fueled by the tech boom during the years of the pandemic, which had brought deposits to almost 200 billion dollars at the beginning of 2022, quadruple the levels of 2018, before falling to almost 175 billion at the time of the collapse.
Funds that the Santa Clara institute had partly allocated to investments considered safer at the time, such as low-risk but long-term bonds. However, through these securities, the bank was exposed to the risk of rate hikes, such as those that occurred in the last year following the turnaround decided by the US central bank to combat inflation. The same risk to which some of the depositors were exposed, who saw the value of their start-ups fall as the cost of money increased. An interconnected clientele, accustomed to holding very large sums at the bank. In almost all cases, the deposits exceeded the threshold for the federal guarantee, equal to 250,000 dollars (in Italy it is 100,000 euros), with one company even reaching a balance of 3.3 billion dollars: in the eventuality of a bankruptcy, only 3 percent of all deposits were insured against possible losses. Details that seem to have escaped the supervisory authorities and, in hindsight, have gone to compose the perfect recipe for a bank run, which punctually took place on Thursday 9 March.
Recipe for disaster
After the closure of Silvergate Capital, another bank in which customers had lost faith, the flight from SVB began. Before long, customers were trying to withdraw a quarter of their deposits, while the stock was losing more than 60 percent. The next day, the bank was already under the control of the authorities.
Thus, in the space of a few hours, the largest bankruptcy since the 2008 crisis and the second in US history took place. A crisis that has prompted the markets to turn their attention towards the banks most at risk, in the new context of high inflation and rising interest rates. And it has rekindled the old debate on deregulation, the main culprit for the excesses that led to the 2008 crisis.
“It was (a crisis) foreseeable and it was foreseen”, wrote the Nobel Prize in Economics Joseph Stiglitz, who considers the failure of Silicon Valley Bank the logical consequence of reforms such as those wanted by Donald Trump and of the choices made by the bank central. In the sights of the economist, known for his contributions on information asymmetries also in the banking sector, there is the president of the Federal Reserve, Jerome Powell, and the monetary tightening imposed in the last 12 months. Not only are the hikes “the wrong way to fight inflation” and “the most direct and sure way to recession”, but they also have effects on stability: according to Stiglitz, it was foreseeable that they would “cause trauma somewhere in the financial system”. Powell is also accused of helping Trump, as an adviser, dismantle some of the rules introduced after the 2008 crisis.
Political responsibilities
Immediately after the bankruptcy, the memory of many critics went to the proposal approved five years ago, on the impetus of Silicon Valley Bank itself and other medium-sized banks. “It is the direct result of an absurd 2018 banking deregulation bill signed by Donald Trump,” Bernie Sanders said bluntly. A proposal that allowed banks like SVB “to take risks, increase their profits, pay their executives, giant bonuses and finally blow up the banks,” reiterated Elizabeth Warren. The senator, Sanders’ rival for the votes of the left of the Democratic Party in the last elections, also presented a proposal to repeal the changes introduced in 2018.
The reform allowed institutions with less than €250 billion in assets to evade the obligations expected of the largest banks, such as those to undergo annual stress tests and meet capital and liquidity requirements. There are doubts whether the rules could actually have prevented Silicon Valley Bank from going bankrupt, even though several warned of the risks at the time. The Congressional Budget Office had explicitly said that the easing increased “the likelihood that a large financial firm with assets between $100 billion and $250 billion will go bankrupt.”
At the time, Silicon Valley Bank was one of the institutions that had engaged the most in lobbying efforts. His boss Greg Becker said tighter rules would “stifle our ability to provide credit to our customers without any correspondingly significant reduction in risk,” given “the low risk profile of our operations and business model.”
Other critical voices of public intervention in the economy have also significantly subsided in recent days. Investors known for their conservative stances were among the most vocal in calling for government intervention to protect deposits that weren’t covered by collateral. “Where’s Powell? Where’s Yellen? Stop this crisis NOW. Announce that all depositors will be safe”, was the heartfelt appeal of investor David Sacks, before being satisfied by Joe Biden. “Excuse me, now is the government the answer?!?”, one of the replies, between incredulous and mocking, from Twitter users. Even more pungent is the message of a Wall Street veteran, investor Jim Chanos. “It was literally the venture capital community that started the bank run on Thursday (March 9, ed), when it urged the companies (in which it invested) to withdraw their deposits. And now they want the taxpayer to save their investment,” commented Chanos. “Capitalism, in Silicon Valley sauce”.
