Few people in Italy knew of it, at least until last week. But Silicon Valley Bank, a commercial bank based in Santa Clara, California, has filled the financial headlines around the world in just a few days, from New York to Rome, via London, Paris, Tokyo and Beijing. Everything is linked to the veritable crash that the overseas bank suffered in recent days, after depositors competed to withdraw their money, causing a liquidity crisis.
The stock exchanges reacted accordingly, with a collapse of the main world stock markets, from the United States to Europe, even raising the spectre of a contagion effect on other banks and of a new financial crisis like that of 2007-2008. Before giving credence to too much easy alarmism, however, it is a good idea to review in broad outline what happened to SVB, which is a reality sui generis, quite different from the banks that Italian savers have to deal with every day. Broadly speaking, Silicon Valley Bank is first of all an institution very focused on the technology sector, and in particular on venture capital, i.e. funds that support innovative companies with high growth potential.
Secondly, SVB has implemented foolhardy risk management, investing the resources raised in the short term (primarily through deposits) in long-dated financial assets, including bonds and Mortgage-Backed Securities (Mbs). These types of fixed-income financial instruments, as anyone familiar with the mechanics of finance knows, depreciate considerably when interest rates rise, as has been the case in recent months. Thus, faced with a rush of customers quickly withdrawing their deposits, a bank with balance sheets like SVB inevitably ended up in a liquidity crisis, being forced to repay depositors by selling securities and long-dated assets that were heavily devalued, incurring astronomical losses.
"SVB is a rather special bank of its kind because of several factors that make it different," says Generoso Perrotta, Head of Financial Advisory at Banca Generali, who adds: "Its business model focused on venture capital is not typical. While it is the element that has allowed the company to grow exponentially over the past four years, fostering an increase in deposits of about 180% since 2019 (a rate well above the rate recorded by the average US bank), it has led to a strong concentration of short-term liabilities, which mainly refer to large companies and not to retail investors. By contrast, the deposits of the largest US banks refer for a large share to retail customers, resulting in a greater diversification of their balance sheet liabilities".
Beyond the specifics of SVB, however, there was great concern in the markets, for several reasons. Firstly, because the case did not remain isolated and other banks went bankrupt in the same days. First Silverbank (albeit for different events related to cryptocurrency platforms), then Signature.
Investors' fears then turned to First Republic Bank, whose rating was recently downgraded by the rating agency Fitch, downgrading the bank's bonds to junk bonds. The decision of the 11 largest US banks to deposit USD 40 billion with the regional bank could help to reduce short-term risks on the institution.
In addition, markets also fear for the fate of US regional banks that have very unbalanced assets on short-term deposits and, as was the case with SVB, run the risk of suffering a liquidity crisis.
The answer according to the numbers and the macroeconomic environment is no. Moreover, the situation of the banking sector globally is very different from the time of the financial crisis in 2007-2009. The level of bank capital and 'capital security' instruments is now USD 17 trillion compared to USD 5 trillion at the time, providing much higher levels of deposit safety. Moreover, the levels of asset control by central banks on banks of global systemic importance, and in Europe on all those with assets above EUR 30 trillion, are high to ensure that there are no risks.
With this background scenario, the financial community is wondering what the central banks will do, as SVB's collapse is also an indirect consequence of the rise in the cost of money, as well as mismanagement. On 16 March, the President of the European Central Bank, Christine Lagarde, raised interest rates in the Eurozone by another 50 basis points, as already announced, assuring that the banking system in the Old Continent is solid and not vulnerable in the face of US events.
How will the Federal Reserve, the US central bank, whose apex body (FOMC) will meet on 22 and 23 March, behave?
"In light of the latest events and the tensions that have characterised the financial markets in recent sessions, the hypothesis of a 50 basis point rate hike at the March FOMC appears increasingly less likely," says Perrotta, who adds: "Although the SVB case can, in all likelihood, be considered a particularly anomalous one, its failure in a context of restrictive monetary policy, high inflation and prospective economic slowdown calls for caution. With the deep inversion of the yield curve, which has reached levels not seen since 1981, borrowing short to spend long is not a profitable business model".
Generoso Perrotta, Head of Financial Advisory
SVB is a rather unique bank of its kind: its venture capital-focused business model, while being the element that has allowed it to grow exponentially over the past four years, has led to a strong concentration of short-term liabilities, mainly related to large companies.
