The question that seems prevalent in many people’s minds is whether Silicon Valley Bank’s (SVB) sudden failure spread to other banks. The answer is that we honestly do not know, but as of now, it seems doubtful that it will create a financial crisis in the banking community. There is a somewhat basic explanation as to why there was a run on this particular bank, and it deals with its concentration of customers and the assets it owned.
SVB did heavy business in the tech sector, with a large portion of its customers doing their business in the tech industry, creating a concentration of deposits. Last week many venture capitalists told SVB’s tech customers to consider taking their deposit accounts out of the bank, causing a tech customer run on the bank, so to speak. As the deposits were honored by SVB, they ran into a cash shortage as banks only maintain a portion of their deposits in actual cash, meaning the rest is either loaned out to other customers or invested in bonds. As customers withdrew their cash from SVB, it was forced to sell bonds to cover the outflow of this cash by the tech industry in particular. Here is where the issues mounted.
When a bank or anyone owns a bond that pays a fixed interest rate, there are no issues if that bond is held to its maturity and the bond’s issuer has repaid the interest and will then repay the face value of the bond. The problem with SVB was that they owned and had to sell older bonds that paid a lower interest rate than what bonds currently pay. When this happens, the value of the bond decreases to compensate the new owner for the lower interest rate being paid on that bond. Let’s face it, if you were to invest a thousand dollars in a bond would you want one paying 1% or 4%? To sell their bonds, SVB had to sell them below face value at a loss to compensate the buyer for the lower interest rate they would receive from the issuer. Then the customers continued to withdraw funds due to the assets not being worth what was stated, as I am certain they were designated held to maturity and not available for sale. Here is an article on bond prices, How Bond Prices Work.
These two issues caused SVB to attempt to issue stock late in the week to raise additional capital to try and save the bank, ultimately failing to sell the additional stock or save the bank itself. The worrying issue to many is the speed at which these events took place, from when the deposits started flowing out of SVB to selling depressed bonds to cover the withdrawals to, finally, the failed attempt to raise additional capital through a stock sale. We are talking less than a week, basically 48 hours.
The other issue that needs to be solved is what the failure of SVB will have on the cryptocurrency market, as USDC Stablecoin is pegged to the dollar, much like a money market account. Over the weekend, USDC hit a price in the mid-eighty-cent range. Much like money market accounts in 2008, USDC broke the dollar peg. What does this mean? That is a question I cannot answer, as I have avoided cryptocurrency like the plague. But we know that USDC had $3.3 billion in SVD when it collapsed and was taken into receivership by the FDIC. For more on USDC, visit Wallstreet Journal. And here is an article on other tech companies with large uninsured deposits at SVB Tech with excess money at SVB. These events will indeed affect the cryptocurrency market this week. Again, how is what I need to learn, and I wonder if many know what will happen due to these events.
If you are worried about the events at SVB spreading, I can only recommend that you ensure your bank is FDIC insured and that the balance is under $250,000, meaning the entire account will be insured in the event of an unlikely bank failure. Contact another fee-only financial advisor or me if you have any questions or concerns about how this could affect other banks.
