Silicon Valley is where IT (Information Technology) start-ups gather so much. Silicon Valley Bank is considered a cash cow for startups. If a startup invests money in Silicon Valley Bank, the bank will run by lending the money to other startups. Many companies familiar to us, such as Spotify and Airbnb, have passed through Silicon Valley Bank. However, what should we do if such a famous bank has collapsed? ST took a close look at this Silicon Valley Bank bankruptcy case. ...............Ed
SVB (Silicon Valley Bank) was a bank that primarily dealt with startup companies in Silicon Valley in the US (United States), and had contributed to the growth of venture capital and startups over the past 40 years since its establishment in 1982. At the end of 2022, SVB’s assets were an impressive $209 billion, equivalent to being the 16th largest bank in the US. However, it was recently closed by US financial authorities following a sharp drop in its stock price. The process of SVB’s collapse was as follows: To revive the sluggish economy due to COVID-19, the benchmark interest rate was raised significantly, which benefited venture capital and startups. SVB had a structure that earned plenty of profit through loan businesses that target startup companies, but the companies were no longer able to borrow as the benchmark interest rate rose. Unable to earn revenue from loans, SVB reinvested the deposits that its customers had entrusted to them. As the period of liquidity spraying ended, SVB’s unrealized bond losses surged tremendously. Many companies noticed this loss and started withdrawing their deposits, causing the bank’s cash reserves to decrease. Banks are required by law to have a certain amount of cash reserves, called reserve requirements, on hand to prevent bankruptcy in times of emergency. As the reserve requirements became insufficient, SVB eventually declared insolvency and went through the bankruptcy process.
The first cause of SVB’s bankruptcy was due to their losses in bonds. Bonds have a structure in which their price falls when interest rates rise. This becomes an issue if bond sales occur at a time when US interest rates soar, causing bond prices to plummet. This happens because demand for the older bonds, which are issued with a lower interest rate, fall when newer bonds with higher interest rates are issued. For example, if existing bonds were at 3%, and the interest rate of newly issued bonds was 5%, people would naturally try to subscribe to the new bonds with higher interest rates, causing the price of existing bonds to fall. Since SVB needed the cash at hand regardless of the plummeting price of the bonds, they were forced to sell at a loss, resulting in a net loss of approximately $1.8 billion.
The second cause of bankruptcy was due to their rights offering. A rights offering is established when a company increases its capital by increasing the number of shares in the company to increase its capital. SVB pursued the rights offering to cover the losses from bond selling, but when this became known, a bank run occurred. A bank run refers to a large-scale withdrawal of money from a bank, where people who had deposited money in the bank believe that the bank’s system has collapsed or its reliability has deteriorated, and they withdraw their money all at once. In just one day, about $42 billion was withdrawn, causing SVB’s stock price to plummet. When it was clear that the situation was unresolvable, the U.S. government eventually stepped in, suspending their operations. The bank, which had been in business for 40 years since its establishment in 1983, ultimately went bankrupt in just 36 hours.
1. The Rise of Gold Prices
At the end of March 2023, gold rose to 85,020 won per gram in the KRX (Korea Exchange) market, the highest price since the KRX began trading on March 24, 2014. Not only in Korea, but also on COMEX (Commodity Exchange) in New York, it was traded at $2,038 per ounce, close to the all-time high, which is a 1.9 percent increase from the previous trading day. This is because safe assets like gold rise in price after a destabilizing event, such as a bank run. Though US national bonds are typically considered safe, the market for a safer asset had grown since the bankruptcy of SVB, indicating a loss of some trust.
2. National Pension Service
As of the end of 2022, the National Pension Service had about 100,000 shares of SVB, worth about 30 billion won, and, therefore, the stock price of the national pension was an 8 percent loss due to SVB’s bankruptcy. Since the National Pension Service operates with public taxes, if the drawing of investment funds becomes unstable, dissatisfaction and anxiety increase as people’s taxes were considered wasted. However, this has subsided due to the National Pension Service’s announcement of countermeasures and the US authorities’ guarantee of 100 percent bailout for depositors.
1. Unrest in the Banking Sector and Serial Bankruptcy Crisis
Other banks in the US that had US national bonds, like SVB, had been also at risk of bankruptcy. An example is the case of the First Republic Bank. As the bank’s primary customer base were the affluent classes, who had deposited large sums of money, it was more exposed to the potential risk of bank runs and bankruptcy. The share prices of the bank plummeted, but rebounded soon after the bank announced its countermeasures against such an incident. Such an unstable market brings a sense of crisis by itself, causing further instability and panic.
2. Donald Trump vs. Joe Biden
In an emergency response to the SVB bankruptcy, current US president Joe Biden announced a policy that strengthens financial regulation through a public address on April 13, 2023, and, at the same time, criticized that the SVB incident happened due to relieving of the “Dodd-Frank Act” by the former government of Donald Trump. The Dodd-Frank Act is a financial regulation introduced in 2010 by the Obama administration at the time when it suffered from the global financial crisis in 2008. It was a measure that paid special attention to the bank’s bankruptcy to prevent high investment. Trump retaliated, stating that the US would suffer a greater depression in the future.
The point of paying attention to this SVB bankruptcy is the 'development of digital technology.' There are two reasons why SVB collapsed in an instant. First, there was the Internet banking. With the development of the Internet banking, people can withdraw money with a 'single touch' of their fingers. Therefore, the mere rumor that a certain bank is on the brink of bankruptcy can cause people to withdraw their money in advance. Second, there is SNS (Social Network Service). Due to SNS, the news of SVB's loss spread quickly and, at the same time, numerous rumors and fake news poured out. George Ball, chairman of the investment firm Sanders Morris Harris, said in an interview with Fortune that "social media's role in terms of savings and investment flows will continue to grow."
Kim Tae-eun (Planning Editor)
Lee Yun-so (ST Reporter)