SVB bankruptcy: what happened and what's next?

Last weekend, a bank called SVB (Silicon Valley Bank) in the U.S. went bankrupt. The bank mainly served Silicon Valley companies in the U.S., but in recent years, as startups focused on survival rather than business expansion, the demand for funds decreased, and the loan business was not doing well. Therefore, the bank used the money it received from deposits to buy and hold bonds, mainly U.S. government bonds. SVB announced that it would sell its bond holdings at a loss and issue $2.25 billion in new stock to improve its balance sheet, but major venture capital firms realized that the bank's health was in trouble and sent emails to customers advising them to withdraw their deposits, causing a massive run on the bank with over $42 billion in deposits exiting SVB. The SVB bankruptcy was a case of a Silicon Valley bank in the United States that became unable to make loans and tried to raise money by selling bonds it had purchased with deposits, resulting in large losses, which caused market turmoil and a bank run. This incident suggests that other banks may find themselves in the same situation, having to sell bonds they hold in order to respond to deposit withdrawals, but with the recent rise in interest rates, their prices have been significantly reduced, and losses are likely to be locked in. This could result in the bankruptcy of not only individuals, but also businesses that had deposits with SVB, and other economic entities could be adversely affected. This event could be interpreted as the beginning of cracks and noise in the US economy, and it remains to be seen how much of a ripple effect this will have on markets.

SVB's bankruptcy sends ripples across the globe, spurring safe-haven demand

Experts believe that SVB's high concentration of assets in long-term U.S. Treasuries may have contributed to its rapid collapse. They explain that in the short term, rising interest rates caused the price of long-term bonds to plummet, but the bank was forced to sell them at a loss in order to return deposits, causing it to collapse quickly. The SVB bankruptcy sent shares of its parent company, SVB Financial, plummeting more than 60%, sparking market jitters and prompting US authorities to shut it down. It is believed that SVB's high concentration of assets in long-term U.S. bonds may have contributed to its rapid collapse, and other banks may be facing the same situation, leading to a surge in safe-haven demand.

Temporary drop in USDC price

As of now, the price of USDC, the world's second-largest stablecoin, has temporarily dropped to $0.879 as a result of SVB's bankruptcy. This is a dire situation for a stablecoin whose value is typically based on existing assets (e.g., dollars, euros, etc.) that are linked to it on a 1:1 basis, and is lower than it was during the FTX debacle last year. The Silicon Valley Bank bankruptcy has tied up 8% of the $3.3 billion worth of reserves in USDC's issuer circle.

Source: https://coinmarketcap.com/ko/currencies/usd-coin/

What to do in response to Silicon Valley bank failures

The U.S. Deposit Insurance Corporation has stated that it will respond quickly to the situation, and it is expected that the vast amount of money that is not covered will only be returned after the bank reorganizes or sells its assets, with a maximum of $250,000 per person covered, not all of it. There are also concerns about how much of a ripple effect the closure of Silicon Valley Bank will have on U.S. or global financial markets.

Will other banks be safe?

Bankruptcies start with high interest rates. As Silicon Valley companies found it harder to get funding and kept running to the deposits they had left with the bank, the bank began selling bonds it held to raise money to pay its customers. These bonds had low interest rates when they were purchased, but now interest rates have risen so much that they had to be sold at a loss compared to when they were purchased. In the process, SVB lost a lot of money, tried to raise money from shareholders to make up for it, and created a panic when depositors realized the bank was running out of money and withdrew their deposits from the bank. The U.S. government decided to close the bank down because it couldn't save it.

It's also worth noting that bond prices became vulnerable. If depositors get nervous and rush to withdraw their deposits, almost all banks are bound to face the same outcome as SVB: they have no choice but to sell the bonds they hold, including government bonds, to counteract the deposit withdrawals, but the bonds that banks hold have been depreciating in price due to the recent rise in interest rates. This means that if they sell in the middle, they are locking in a loss, and if worried depositors accelerate their withdrawals, a credit crisis is bound to occur.

Prior to this incident, a quarter-point rate hike at the March FOMC meeting was all but a foregone conclusion, but there is now a growing consensus that the Fed will hike less to stem financial risk. Reflecting this, bond market rates fell considerably over the weekend. 

Looking ahead

Companies that have large deposits with SVB could end up going bankrupt, and without knowing which ones will, it's inevitable that everyone will run for the hills and stop investing or lending to companies for the time being. The stock prices of companies that are already known to have funds with the bank have fallen.

The process of selling the rest of the assets that SVB has on the market to return deposits to depositors will soon begin, which could cause the price of the assets that SVB has to fall. (The bank holds the majority of its securities as mortgage-backed securities, or MBS.) Then other economic entities that hold those assets will also be adversely affected. The question is how far the cascading effects will spread.

In a narrow sense, this is the failure of a U.S. bank, but in a broader sense, it represents a crack in the U.S. economy caused by the high interest rates that have been in place for the past year. Financial market experts are predicting that the closure of the Silicon Valley Bank will have widespread consequences for startup companies, leaving some struggling to even pay their employees. While the U.S. Deposit Insurance Corporation has said it will begin the process of making payroll payments under deposit insurance, the vast amounts of money not covered are expected to be returned only after the bank's assets are reorganized or sold, leaving the entire U.S. startup scene with a scar from which it will be difficult to recover. For now, we'll just have to wait and see how far the ripple effect goes, as depositors in the U.S. will likely pull their money out of any bank that makes them feel the least bit uneasy and move it to a larger, safer bank, and in the process, smaller banks may find themselves in the exact same situation as SVB.