The bankruptcy of Silicon Valley Bank and Signature Bank reopens the scenarios that fear had tried to push into oblivion since 2008. What appeared to many as a sudden event, for others constituted a confirmation of critical perspectives in the very probable imminence of a recession determined, among others, by the interest rate identified by the central banks, necessary to slow down inflation.
Silicon, a Californian bank founded in 1983 and a trusted institution in the world of tech startups1, ranked 16th among US banks, despite a recent positive rating from Moody's, became the second largest bankruptcy in US credit history after Washington Mutual in 2008. Silicon was effectively the result of the zero-interest period and a consequent vulnerability.
Net of the cabal that identifies Moody's as an attractor of negative astral influences, there are still some realities on the table to reflect on, including the rating.
A few steps back. Long-term capital flows to the brand tech they poured into bank coffers; the problem is that, given the inflation, the monetary tightening of the central banks followed, which reduced the picture.
But be careful: in America the capital requirements of the largest banks, not Silicon, in their stringency contemplate deposit bases so large that they cannot attract significant numbers of retail customers; unlike what has been done by Silicon, the authorities, by differentiating it, have also tried to prevent lenders from concentrating on a single activity, while also keeping a distance from dangerous assets such as cryptocurrencies.
Last but not the least, thanks (sic!) to politics, much of the US banking system is not subject to the Dodd-Frank Act, given that in 2018 President Trump approved deregulation legislation aimed at exempting banks with assets of less than 250 billion. Outcome: Dodd-Frank supervision applies only to the twelve largest US banks with assets over $250 billion. And the others?
The drama takes shape. As funds dwindle, startups continue to burn resources for investments and salaries; bank deposits diminish and the SVB, in order to meet the withdrawals, is forced to sell part of the stock of long-term securities, those which, with bonds guaranteed by the federal government, it has purchased to employ the capital. Little problem: Rising interest rates in 2022 and 2023 caused these bonds to plummet, and a feature of bonds is that when yields or interest rates rise, prices fall and vice versa.
Brief sad epilogue: capital shortage, startups2 which they recommend take the money and run away, keeping the $250 covered by federal deposit insurance at most. Something like the famous two grams, mere pennies of Mary Poppins, capable of unleashing a bank runs which, on the evening of March 9, saw 42 billion dollars of deposits flowing out.
No ending type The Life is Beautiful, no white knight, only the State which decides to stop the bank with branches still open with the intervention of the FDIC3, according to which around 90% of deposits are not covered, meaning that thousands of companies will find themselves with funds locked in Silicon.
What about investments? And worst of all, salaries? Is this a separate story or the Lehman Brothers refrain, which came 6 months after the Bear Stearns bailout4? At what stage is the night? Is the contagion confined to California, or is it the beginning of the tech sector crash? And the other sectors? What if cracks are spreading from the fragile wall of cryptocurrencies, themselves suffering?
Some of the triggering problems are common to the entire banking sector, starting with the Federal Reserve's interest rate hikes to fight inflation. Silicon has started having problems with saving deposits in federal securities that are suddenly worth much less than when they were purchased5. The bankruptcy brings the 175 billion dollars of deposits under the control of the FDIC, de facto bankruptcy trustee, which reopens the branches under the most auspicious plaque National Bank of Santa Clara.
Until a few weeks ago Silicon was solvent, then in a single day the rush to withdraw deposits literally cut off its legs, with the prospect that entrepreneurs and hi-tech workforce in Silicon Valley will pay the price with the loss of hundreds of jobs. By allowing bankruptcy without guaranteeing a parachute for all depositors, according to Bill Ackman, investor at hedge fund Pershing Square Capital Management, we have finally realized that an uninsured deposit is like an unsecured cashless claim on a failed bank.
Other Californian banks linked to the tech world have long been in pain: Western Alliance lost 30% of the stock value in 35 days; First Republic Bank 40%6. Silvergate Capital Corp, has already closed its Silvergate Bank, liquidated after losing 96% of the stock market value in the last year. Silvergate has a point in common with Silicon, it operates with the crypto world, the junction between the consolidated financial system and that of private currency blockchains. The loss of confidence in the sector, increasingly similar to a speculative bubble, folded Silvergate after the collapse and fraud of the exchange platform Ftx.7 Just after a series of withdrawals following the Silvergate crack, Silicon allegedly ran into liquidity difficulties8 despite having already sold all the assets needed to raise cash9. The failure of Silicon, which has not been able (an unforgivable fault) to differentiate investments, has already brought down the USDC, a cryptocurrency with the claim to be more stable than the others because it is guaranteed by real money and not by algorithms: 3,3 billion dollars paid into Silicon's accounts are now unavailable. If there really is contagion, it goes back and forth from the tech crisis to finance and then back again like the undertow.
It was the fear of the Silicon affair that hit markets already penalized by an aggressive monetary policy and characterized by the Fed's rate hike. Even if it is still necessary to analyze the situation carefully, there could be systemic risks, even if they do not concern specifically Svb or the banking sector; the danger comes from the real economic world, given that many startups have to negotiate new maturities at higher rates for their debts, running the risk of leaving their exposures to banks unpaid.
While the bankruptcy of Silicon has led to a negative 4,58% of European lists, the looming danger is that of the increase in the cost of money, and the uncertainty of the financial sector, with the growing fear of losses for banks unprepared for another bank runs.
Inevitably, Silicon has aroused more than one concern10 since in one day they are evaporated more than 80 billion from the stock market made up of the S&P 500 banks index. Silicon's collapse comes at a time of declining trading, with tens of thousands of imminent layoffs and with investors with capital at risk.
Meanwhile, the Bank of England, that of two grams, miserable mere pennies, did not hesitate to open insolvency proceedings for the UK subsidiary, purchased, as deposit protection, for (hear! hear!) 1 pound, excluding the assets and liabilities of the parent company. In any case, with the Federal Bank ready for a new increase in interest rates, the risk for the stability of the financial system cannot be said to have ceased; the moment of stasis cannot make us forget how the stock exchanges went into suffering presaging greater dangers and above all feeling the wounds of the last great recession still throbbing.
In this California nightmare (of course dreamin') however there are those who benefit from it: voids of any kind are not allowed, and therefore the startups have already left in search of new institutes.
In the background, the central banks that manage monetary policy and the size of the reserves necessary to deal with critical cases like this, recovering credibility within the international system and strengthening the stability of the currency by intervening on the foreign exchange market.
And here we are on the minefield of cryptocurrencies. Right now, thinking that a Tesla can be bought with bitcoins gives the idea of an unscrupulous economy where (lawful) enrichment passes through (reprehensible) speculation rather than through the (tiring) success of an enterprise11; in short, an unreasonable euphoria that justifies paying for the smell of the roast with the jingle of the coin. The future could also be this, but of course the image of two grams, mere pennies inevitably brings us back to a much more angular reality.
If the value cripto fluctuates so much, who would run the risk of seeing the value of the purchased asset halved in one devastating butterfly flap? An unstable currency is just an investment, perhaps a good one, but not as remarkable as the stock one. However, at a time when earning prospects appear like the tantalizing scent of roast, there may be someone willing to give up the coin instead of the simple jingle, especially small savers, the first to cry when the bank run begins.
Abandoning productive investments in favor of financial stakes is certainly not a good sign. It would not be so bad, once the euphoria has passed, to remember the volatility, the difficulty of acquisition, the regulatory deficiency and the limited monetary policy of cryptocurrencies, as demonstrated in 2022 by the collapse of the stablecoin TerraUST and Luna, which burned almost 45 billion dollars of market capitalization in a week.
It was sort of Chain of St. Anthony badly managed? Perhaps. It would be enough to remember that cryptocurrencies, useful for circumventing sanctions and sometimes as a symbol of monetary emancipation, are not securities, and even if they attract populist leaders12 of countries where the volatility of cryptocurrencies is accompanied by the instability of legal tender currencies13, retain a speculative aura accompanied by inequality in the distribution of wealth.
Small detail: the use of bitcoin and the like is not without dangers, first of all the risk for monetary sovereignty, given that the more its use for domestic and international payments becomes widespread, the less control over autonomy and monetary circulation is maintained, making the quantity of money depend on the balance of payments.
What if the government invests in crypto? The risk extends to public finances which, in situations such as the Californian one, could find themselves in serious difficulty; if the advantages of cryptocurrencies, security14 and lack of "intermediaries" are in fact not guaranteed, it is better to resort once again to the good old bank systemic regulated, like the solid brick of Antonio Capone, alias Totò, grappling with Peppino and the bad girl, unless competing governments inaugurate the just bitcoin.
We will see; meanwhile the good old man greenfinch it continues to be the most widely used currency both as a reserve instrument and as a means of payment. What an ugly world! one might say... a paradoxical world, like the founder of the failed FTX crypto platform, starting with the surname Bankman-Fried. It is obviously an attempt to play down the drama, but who would entrust their investments to a very Italian? Samuele Banchiere Fritto? Regardless of the jokes, for the liquidator of FTX it is an unprecedented situation that competes with Silicon.
In summary, in addition to money, there was suddenly a lack of confidence in a system in which the American government had to step in with a straight leg with the promise of reimbursements in rain, demonstrating that perhaps the time has come to return to the traditional enterprise, little a la page, tiring but safer.
In the light of the reassurances of the circumstances, for which Flaiano would have said that the situation is serious but not serious, and the simultaneous collapse of Credit Suisse, the crisis risks, although different from bank to bank, remain.
In conclusion, once again central banks are playing an essential role, which shouldn't come as a surprise due to its regulated institutional nature, but which is perhaps striking due to the circumstances which, just now, have brought about it due to an evident corporate immaturity. By analogy, the duck egg nugget which in the Yukon allows Scrooge to start his business activity, in the end is certainly not guaranteed by risky or purely electronic activities, but by concrete banking bases, certainly less psychedelic but certainly more secure.
Meanwhile, pending verification of the scope and systemic nature of the SVB collapse, the reassurances to be provided to account holders will involve higher rates on deposits, together with a new governance of long-term securities, together with the extension to all American credit institutions, none excluded , regulatory and control standards. In light of the recessionary risk and inflation already at work, even if, and I emphasize if, the contagion from the bankruptcies of SVB, Silvergate and Signature can be controlled, the risks to financial stability have grown far too much. Lack of controls, crazy exemption from rules, inaccurate ratings, failure to consider the dynamics of economic cycles especially if related to debt, seaside entrepreneurship, bring to mind a classic but very topical affirmation: lYouth grows old, immaturity fades away, ignorance can become education and drunkenness sobriety, but stupidity lasts forever.
Let's hope that's not the case, but the icy Credit Suisse's difficulties lead us to fear the opposite.
1 In 1986 Silicon merged with National InterCity Bancorp; in 1988 it managed to go public; in 1991 it internationalized with the launch of the Pacific Rim and Trade Finance companies
2 See Peter Thiel's Founders Fund
3 Federal Deposit Insurance Corporation
4 Investment bank
5 The stock sell-off came after FDIC data showed US banks hold about $620 billion of unrealized losses in their portfolios.
6 At the moment, the First Republic Bank is also in the grip of chaos and, according to Bloomberg, is also considering the sale. The rating was downgraded to junk by S&P Global Ratings and Fitch Ratings.
7 The Circle said $3,3 billion of its $40 billion USD Coin cryptocurrency reserve is held in Silicon, which has sent its cryptocurrency plummeting in value by calling for an urgent federal bailout for Silicon.
8 According to Bloomberg, just before the crash, cracks were already visible, as rising interest rates have left banks with bonds that cannot be sold without losing. If too many customers withdraw at the same time, banks are forced to offer higher interest, eroding earnings. Smaller banks, where funding is less diversified, may, as has happened, come under greater pressure forcing them to sell shares.
9 Silicon Bank actually grew with Silicon Valley; its deposits rose from $44 billion in 2017 to $189 billion at the end of 2021. According to the Economist “While its loan portfolio only grew from $23 billion to $66 billion. Since banks make money on the spread between the interest rate they pay on deposits (often zero) and the rate borrowers pay, having a much larger deposit base than the loan portfolio is a problem.".
It should be noted that Greg Becker, CEO of Silicon, less than two weeks before the crash, sold shares for 3,6 million dollars.
10 Major US banks affected: Wells Fargo & Co down 6%; JPMorgan Chase & Co down 5,4%; Bank of America Corp down 6%; Citigroup Inc down 4% less.
11 Several statements by Elon Musk have contributed to raising the price of bitcoins, for which the company has invested 1,5 billion dollars in bitcoins, accepting them in payment for the purchase of cars.
12 See Hugo Chavez in Venezuela or Nayib Bukele in El Salvador
13 Since the first months of 2022, the Turkish lira has been more volatile than bitcoin; Conversions of rubles into bitcoin and tether intensified in March 2022, as the Russian currency depreciated as sanctions were tightened following the invasion of Ukraine.
14 There are many platforms, small or large, that are born and fail. Cryptowisser.com tracks those who die, the Lehmann Brothers of crypto, on the page Exchange graveyard, exchange cemetery, as evidence of the users who, by paying, mourn the disappearance of investments perhaps thanks to the Ponzi scheme used by Madoff
Photo: Credit Suisse