Recently, a couple of jolts from across the Pacific Ocean were felt in this part of the world, when Silicon Valley Bank (SVB), which has for decades served the area it’s named after, went under. Last weekend, as news of the largest US bank collapse since the Global Financial Crisis unfolded, I woke up to emails from startups declaring that they have either zero direct exposure or de minimis indirect exposure via service providers to SVB.
As it turns out, these proactive start-ups are in a better position. Just a week before the bank run picked up pace on SVB, another bank, Silvergate Bank (trading as Silvergate Capital Corp), had been unwinding — marking the first failure of a bank backed by the US Federal Deposit Insurance Corp (FDIC) since 2020.
No thanks to the use of Silvergate, thousands of other start-ups, including those in crypto-related space, are now left without banking and payments services, feeling befuddled about how and where they stand, directly or indirectly.
Meanwhile, stablecoin issuer Circle, which issues the USD Coin (USDC), has some US$40 billion ($53.8 billion) in USDC reserves. It was compelled to announce over the weekend that out of these, US$3.3 billion in USDC reserves are being held with SVB, and will be fully recovered when banks open for business in the new week. Despite the nature of stablecoins, which is to have an equivalent value of assets pegged to the coin, the USDC peg unhinged from US$0.92 to US$0.88 — reminding investors and punters in the crypto world that the word “stable” is an often an oxymoron when put together with the word “coin”.
The New York Times columnist Paul Krugman calls SVB the “Schmoozing and Vibes Bank”, for being “unusually good at cultivating relationships with, um, Silicon Valley”, specifically the venture capitalists. The Santa-Clarabased bank started out lending to real estate and wineries, but found new life in the tech boom of the 1990s lending to early start-ups like Cisco Systems and Bay Networks.
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Even as its share price halved in the wake of the dotcom crash, SVB deepened its niche in the venture capital and the start-up sectors. Along the way, it attracted investors including Mark Cuban and Bill Ackman, who have called for Fed intervention and bailouts of their own book.
When the Global Financial Crisis ripped across American banks in 2008, SVB did partake in some TARP (Troubled Assets Relief Program) funds, but paid back US taxpayers within two years. A global expansion took SVB to London, Germany, Hong Kong, Israel and China (through a partnership with Shanghai Pudong Bank).
SVB was not an unregulated crypto platform that was run by kids with no governance (such as FTX which apparently held on for a week in the November FTX Token implosion and a run on the platform). Up till the eve of the run, SVB passed the smell test many times over. There were supposed to be many adults in the room: SVB has built up a 40-year history; it is a publicly-listed company; it is in an industry that is more highly-regulated than most — banking; its market cap of US$15 billion is no chump change. All this unravelled within 36 hours last week, when a US$2 billion share sale to raise Tier 1 equity precipitated the bank run.
See also: SVB financial must wait to get back US$2 bil from FDIC
How did that happen and what will it mean for 2023? Is this a replay of Washington Mutual (WaMu) that failed in September 2008 as the Global Financial Crisis ignited the contagion, or will it be contained to the community it served?
In regulators we trust
SVB started life with two founders, Bill Biggerstaff and Robert Medearis, who came up with the idea over a poker game in 1983. The final role of the dice — raising equity to patch a deteriorating hole on securities to raise liquidity for deposits — came up short. However, there had been signs for some time that not all was well.
It was a classic risk management failure. First, insufficient diversification, with lending concentrated too much in risky start-up companies and significant webs of VC groups of investee companies. Next, the duration mismatch between long-term investment (assets) vs short-term deposits (liabilities) that lacked a more persistent sticker retail deposit footprint, and not enough capital to endure or raise in anticipation of rising interest rates. Nothing fancy, or so it seemed.
Given that SVB was not deemed a systemically important financial institution (SIFI), the regulators stepped in and took over as the bank run escalated, promising those with FDIC guarantees of up to US$250,000 per depositor would get paid by Monday night. The rest would have to wait for liquidation of SVB’s assets. After all the forced selling, the key questions would be: who gets what is left, and how long will it take? In the meantime, payments for vendors and employees might be delayed, and essential funding rounds to keep the VC backed companies afloat might suffer precocious time decay. Even those with funds “in the bank” might not be able to access or ever recover all of them.
Michael Cembalest, chairman of market and investment strategy at JPMorgan, notes in a March 10 report that “whilst US bank Tier 1 capital ratios, wholesale funding ratios and loan-to-deposit ratios have improved substantially since 2008, there are exceptions”. Regulators have ensured SIFI banks are well capitalised, but SVB was in a league of its own among its peers, with a higher risk deposit base and high level of loans and securities as a percentage of its fleet-footed deposit base. In short, SVB “carved out a distinct and riskier niche than other banks, setting it up for large potential capital shortfalls in case of rising interest rates, deposit outflows and forced asset sales”.
Based on the analysis, SVB was in a world of its own by the end of 2022. While the industry as a whole could suffer from some mark-tomarket losses on their bond portfolios in rising rates, most US banks, like JPMorgan and Citigroup, still had high single-digit, if not double-digit, Tier 1 capital ratios. SVB was close to zero already by then. Where were the regulators? In Singapore, it would be inconceivable that stress-testing different scenarios would not have already precipitated the requirement for a capital plan to address this preemptively.
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Throughout 2022 — as we had described the grounding of tech and VC fluff, coupled with steep interest rates rises by the Fed — SVB already had US$15 billion mark-to-market accounting unrealised losses for securities held to maturity. Ironically, that was still its market cap just prior to its collapse. As billions of dollars in deposits left for Brex, JPMorgan, Morgan Stanley and First Republic, some VCs, including Founders Fund and Union Square Ventures, asked their portfolio companies to move funds en masse out of SVB.
Details are now trickling out that SVB did not have an official Chief Risk Officer (CRO) through much of 2022, with the incumbent resigning in the spring and remaining in the company only nominally until October. The new CRO came on board in January 2023.
The run on the sector continued the correction in Western markets we postulated in early February. Local investors, eager to profit from rising rates, have placed their bets on the three banks: DBS Group Holdings, Oversea-Chinese Banking Corp and United Overseas Bank. With the worries spilling over, these three index heavyweights pulled the Straits Times Index below 3,200 points on March 10. Once again, I bought the STI ETF with my CPF funds with a good-till-cancelled buy order left with my broker. Maybe it’s early, but it’s never possible to catch the bottom!
Winners and losers
It is not unreasonable for investors (and short-sellers) to sell first and ask questions later. Indeed, as the US banking sector dropped 5% last week, there was already differentiation. The weaker non-SIFI, Signature Bank (prominent in the crypto world) saw its shares drop over 30% and was taken over by the Fed on Monday, while First Republic, another regional bank, fell 23%, and SVB’s own US$15 billion market cap largely evaporated. A classic example of a fallen angel in credit risk taking. For financial business, it is amazing how credit risk can quickly spiral from a liquidity to a solvency issue.
As risk assets pulled back globally, with investors contemplating if this is a repeat of 2008, ironically it may be what the central banks have been looking for — with Fed chair Jerome Powell signalling rates higher and longer just before SVB’s demise.
The loss and wipeout of some US$20– US$30 billion in shareholders’ capital back in 2008, by no means small, will cause many to pause, reflect and slow down growth lending and funding weak projects. But, in today’s financial world of well-capitalised SIFI banks, this is an amount that is manageable and containable.
The good news is that markets have voted very swiftly to punish the poor performer whose arguably risky profile had supported the fluffy bubbles of 2021 in public and private markets. The bad news, however, is that it may reduce risk appetite for finance startups and newer ventures, even if temporarily, due to money being locked up in the unwinding process.
In addition, as the emails I received over the weekend suggested, all manner of startups and established companies may now have to accept more scrutiny when pioneering disruptive new business models. This will slow the path to revenue and profitability for earlier-stage (especially tech and digital companies) or new-economy companies.
SVB is unlikely to be WaMu, nor will it be the harbinger of another Global Financial Crisis. What is evident, however, is that the excesses of 2021’s fluffy valuations, no thanks to the combination of over-accommodative monetary policies, deglobalization, supply chain issues and food price inflation, will need more time and pain for major developed markets to work through.
Regardless of a soft or hard landing globally, sticking closer to Asean, which is stable and growing — coupled with China’s re-emergence — seems a relatively better bet. This bout of turbulence should allow the STI to continue to outperform after the initial knee-jerk reaction to SVB; its pullback has been already more shallow than other higher beta North Asian equity markets. “Boring” may be in fashion through 2023, and that’s where I will stay.
Chew Sutat retired from Singapore Exchange after 14 years as a member of its executive management team. During his watch, the exchange transformed from an Asian gateway into a global multi-asset exchange and he was awarded FOW’s lifetime achievement award. He serves as chairman of the Community Chest Singapore