SVB Bankruptcy: Is this a systemic crash?
This is the kind of event that could push the Fed to pivot earlier than expected… signaling the end of the bull market.
“If you bail, more will fail!”
You can immediately see what major event we are referring to from March 8/9: the express bankruptcy of SVB Financial, the sixteenth largest bank in the United States and the first in the Bay Area (San Francisco region), with a 50% market share in financing start-ups, a status as the number one in venture capital (the king of fundraising) and almost all heavyweights on the Nasdaq as clients.
This is the largest bank bankruptcy in the United States since the 2008 crisis and the liquidation of Washington Mutual ($320 billion) in 2009.
SVB is also the banker for the most prosperous entrepreneurs and employees in Silicon Valley, who held accounts worth hundreds of thousands, if not millions of dollars. These deposits were only insured up to $250,000, and 87% of the $173 billion deposited in SVB’s coffers was not covered.
They had never imagined — no more than Wall Street — that the most iconic “regional” bank in the United States (listed on the Nasdaq and with $210 billion in assets), which was celebrating its 40th anniversary this year (Silicon Valley Bank was founded in 1983 in Santa Clara, California, by a Stanford professor and two investment bankers), would go down almost as quickly as an email. Unthinkable bankruptcy
It took just the time for Wall Street to realize that the latent losses on its bond holdings — largely related to the Fed’s aggressive rate hikes — exceeded its equity, and that an emergency capital increase proved impossible given the downturn in “tech.”
Above all, the unthinkable scenario made depositors forget that only the first $250,000 is insured by the FDIC (Federal Deposit Insurance Corporation), and that liquidation of the bank means not only the liquidation of shareholders (market capitalization reduced to zero as of this Friday, March 9, by the bankruptcy declaration) but also of creditors (depositors included).
This realization triggered a chain reaction of withdrawals from so-called “regional” banks. That is, banks that do not belong to the “too big to fail” category but symmetrically appear to be “too big to bail.”
These massive withdrawals of all deposits above the $250,000 limit are the nightmare of the financial system and the Fed. This is called a “bank run,” and when depositors start queuing up for hundreds of meters to get their money back, it takes on a false appearance of the 2008 crisis, or especially the 1929 crisis. Fed to the rescue
To avert the peril of uncontrolled contagion, and nothing less than the day after Lehman’s bankruptcy (but with trillions of dollars of risky credit outstanding in the system than 15 years ago), the Fed and the FDIC — who for the gallery, refused to openly “bail out” SVB — invented the “BTFP,” a new tool that is nothing more than a disguised bailout and renamed the “Bank Term Funding Program”… a kind of TARP (the program launched in response to the subprime crisis) version 2023.
It will allow all SVB depositors (and other banks of the same caliber) to have access to their entire savings, deposits, and claims as of Monday morning, making a bank run irrelevant: all assets are secured, regardless of the amounts, in contradiction to all rules in force since 2009.
The Fed and the FDIC will defend themselves by invoking an exceptional temporary measure, pending the acquisition of SBV by another institution… A little like Bear Stearns by JPMorgan or Merrill Lynch by Bank of America in the fall of 2008.
However, this sets a new precedent for bailouts that is sure to be followed by credit institutions facing a liquidity squeeze, illustrating our opening statement: “If you bail, more will fail.” Because how many banks are simultaneously experiencing huge losses on their bond portfolios, on doubtful loans held on startups or real estate developers that are starting to drop like flies (several real estate investment funds have had to limit or even suspend withdrawals by subscribers), on their auto loan portfolios (a record default rate of 6%), on outstanding consumer loans, and so on?
Did the Fed derail the system all by itself? Will it have to inject massive liquidity into the interbank market through special operations such as open market operations (OMO)?
Will it have to give up its fight against inflation prematurely and raise the cost of borrowing to 5.75% or 6%? In any case, the bond markets have immediately adjusted their expectations downwards by 60 basis points over the past 48 hours. The yield on the 2-year note fell from 5.08% to 4.48% on March 13th!
It has only happened three times: in the aftermath of the September 11, 2001 attacks, in the wake of the rumors of AIG’s bankruptcy (September 2008), and at the start of the Covid lockdowns (mid-March 2020).
Perhaps the Fed will have to activate both levers, which would be equivalent to reinstating a disguised QE, like from September 19, 2019, to the end of February 2020. It would find itself forced into a premature “pivot,” and no less than four 25 basis point rate cuts are anticipated as early as 2024! Undoubtedly, Wall Street would applaud such a scenario for a few days or hours… but it would mean that the financial system is on the brink of collapse and that central banks are surrendering to inflation: game over!
