SVB: After the biggest banking crash since 2008, what happens next?
The news that an actual, regulated bank connected to crypto has imploded sent investors, stock markets, and punters generally into meltdown.
I received numerous texts and calls over the weekend from people saying they had sold everything, or had shifted everything from Coinbase as “I hear it is going bust”. One of them did have the courtesy to say upfront that I would probably tell him not to do anything – which is precisely what I advised.
The collapse of Silicon Valley Bank (SVB) has absolutely nothing to do with crypto, either in terms of volatility, value or anything else. Yes, lots of tech firms bank with it, and it has helped many tech start-ups, but SVB does not and traditionally has not held crypto as part of its assets to any extent.
Instead, this is a story of disaster and mismanagement as old as banking itself – borrowing short and lending long. According to the information available, SVB needed to raise cash to cover the withdrawals that had been and were being made. And why did people start withdrawing cash? Because SVB said they couldn’t raise the money it needed.
The point is, the bank would have had to disclose to its lenders that had made some massive losses and, as a result, its held assets were much lower than people thought. And why would that be? Because the management team and risk officers failed to recognise that when interest rates rise – as they have done very rapidly – the underlying value of the loan drops.
In the simplest terms, if you buy a bond of £100 yielding 1% i.e. £1 per £100, when the money market rate rises to 5%, people will not buy that bond from you £100. If you are lucky, they will maybe give you £20. £1 on £20 is 5%, so you have lost 80% of your capital.
This is exactly what happened with SVB. The bank held lots of US Treasury bonds, all of which have tanked in value. So SVB did not have security to cover the cash it needed. Hence the whisper which resulted in cash disappearing out of the door faster than it could be counted. Many will remember the Northern Rock debacle of 2007. Pretty much the same thing applied: it couldn’t roll over its short-term loans to cover the mortgages that were set for 20 and 30 years.
But back to SVB. Quite apart from anything, the last thing you should do is tell people not to panic – which is what Greg Becker did, immediately signalling disaster. Whether or not there has been any wrongdoing will emerge in time, but be that as it may, this represents the second largest US bank bankruptcy ever, second only to Washington Mutual in 2008. The real trouble for regulators now is that with the wonders of the internet, cash can be spirited away in nano-seconds. You will recall that Binance lost $12billion of its assets in a matter of days not so long ago.
And what of SVB UK? Actually, the authorities appear to have played a blinder. The case appears to be that there is not and nor will there be any disruption to any customer, lender, or borrower, with SVB UK. HSBC may have got a bargain for £1 – some $6.8 billion of deposits and a loan book in the region of $5.5 billion – but there is bound to be some disruption and movement around the overall position.
READ MORE: HSBC acquires SVB UK for £1
This is in distinct contrast to SVB in the US. If you had a credit line with them, that has gone. Not so in the UK. Most interestingly, it appears HSBC might have been gearing up for an assault on the Fintech market anyway – it apparently sent dozens of its staff on the Oxford Fintech course over the last year or so. One would guess, some of those people will be moving into SVB UK already.
So plaudits all round to the people in the UK who worked so tirelessly over the last few days to make this work. Maybe Rishi Sunak wanting the country to be a centre for tech innovation and excellence has much more credibility now.
And, as an aside, what price rate rises are to come now? It would be a very brave central banker who continued to push rates up in the face of serious jitters like this in the markets.