Will Silicon Valley bank failures turn the Fed around?

Silicon Valley Bank (SVB) announced on March 9 that the company sold assets worth US$21 billion and recognized a loss of as much as US$1.8 billion. The parent company, SVB financial group, stated that it will issue Worth $2.25 billion in new shares, the operations sparked fears of a liquidity crisis at the company, causing the stock price to plummet more than 60%, before the Federal Deposit Insurance Corporation (FDIC) moved to shut down and take over the bank, shocking financial markets .

Foreign media estimate that Silicon Valley Bank has US$173 billion in deposits, of which US$151.5 billion (approximately NT$4.64 trillion) has no deposit insurance. However, as U.S. Treasury Secretary Yellen issued a statement stating that the rights and interests of depositors will be protected, the risk of a run on the bank is expected to ease. Silicon Valley Bank also restarted operations today, and the mentality of depositors is like a roller coaster, returning from hell to the world.

However, following the collapse of Silicon Valley Bank, the New York State financial regulator closed the largest encrypted currency signature bank (Signature Bank) in the United States on March 12, which was the third largest bank failure in US history and the third announcement in the US within a week. The closed bank, Silvergate, a commercial bank that also lends mainly to cryptocurrencies, ceased operations and liquidated assets on the 8th.

Why would it fall?
Silicon Valley Bank suffered a bank run, which was caused by the collision of several factors.

First, the Federal Reserve continues to forcefully raise interest rates. This move increases borrowing costs, reduces the momentum of technology stocks, and makes it more difficult for SVB’s core customer base to obtain new funds. to the development of SVB.

Second, most of Silicon Valley Bank’s business contacts are venture capital companies, but venture capital is beginning to dry up due to capital crunch, and start-up companies are forced to use SVB’s funds. When customers quickly withdraw money, Silicon Valley Bank is sitting on a large amount of unrealized bond losses. In addition to selling bonds to recognize losses, it also sells a large number of stocks.

The third is that Silicon Valley Bank’s own products have long-term and short-term mismatches. Generally speaking, commercial banks will not allocate a large amount of investment positions in long-term bonds. However, because the Federal Reserve’s QE has led to lower bond interest rates, the interest rates on short-term bonds are not attractive, thus turning to long-term Treasury bonds. However, rising interest rates have pushed bond prices down, and the longer the duration, the more prices are affected by bond yields, putting pressure on banks whose 10-year bond spreads widened to more than 1,000 basis points on Friday, leading to liquidity problems , is also the main reason for the bankruptcy of Silicon Valley Bank.

Bill Ackman (Bill Ackman), founder of hedge fund company Pershing Square Capital Management, tweeted that this incident suddenly let the whole world know what is called “unsecured deposits”. Evening) before the opening of the market, large banks such as Citigroup and JPMorgan Chase are suddenly willing to acquire Silicon Valley Bank, or the US government is willing to protect the rights and interests of all depositors in this bank. More questions.

Is ‘Cryptocurrency’ friendliness a factor in bank failures?
Banks that have collapsed recently, including Silvergate and Silicon Valley Bank, as well as the recently closed Signature Bank, have been labeled as “friendly to the cryptocurrency industry” because they have many depositors in cryptocurrency-related industries. The source of this is the cryptocurrency industry.

However, Ou Yaowei, CEO of KryptoGO, believes that there is actually no direct relationship between the two. The collapse of the bank is related to the Fed’s strong interest rate hike and improper risk control of the bank. Even, cryptocurrencies and all other deposits of money in banks Like the enterprises here, they are all disaster-affected households. For example, because Circle, the issuer of the stable currency USDC, is also one of the depositors of Silicon Valley Bank, it faced huge market pressure, which caused USDC to be unstable in the past week, but this was actually caused by problems with the bank and the Federal Reserve.

In fact, after a series of bank failures, Circle CEO Jeremy Allaire has issued a statement on Twitter, saying that he is glad to see the US government and financial regulators take key measures to mitigate the risks posed by some banking systems. 100% of the deposit is safe and will be withdrawn at the bank tomorrow, and 100% of the USDC reserves will also be safe, “Circle will transfer the remaining cash on Silicon Valley Bank to Bank of New York Mellon, USDC’s liquidity operation It will resume when the banks open on Monday morning.” According to CoinMarketCap data, USDC prices have recovered to $0.99, almost out of decoupling.

Ou Yaowei believes that the problem of falling bond prices due to interest rate hikes may not only be a problem faced by the two bankrupt banks. Many existing large banks in the market may have related risks. Therefore, the Federal Reserve should slow down its rate hikes to suppress inflation. Otherwise, if the market interprets that “inflation cannot be suppressed by raising interest rates, it may take a small financial turmoil to suppress inflation,” it may cause another wave panic.