For those who dropped out last weekend, here is a recap of the last few days regarding the collapse of Silicon Valley Bank (SVB), now under the control of the American deposit insurance company, the FDIC (Federal Deposit Insurance Corporation).
It is a regional bank located in Santa Clara, California, with assets of 209 billion and specializing in technology start-ups and venture capital firms.
The institution faced a liquidity crisis, caused by a bank run. Depositors demanded their money in droves, which the bank had invested in long-term US government bonds.
These bonds lost value due to rising interest rates (the value of bonds moving in the opposite direction to interest rates). By selling the bonds for cash, the institution crystallized the loss in value on these securities.
A rare phenomenon in Canada, a bank panic nevertheless occurred in 2017 at Home Capital Group following revelations of possible embezzlement, recalls Pierre-Olivier Langevin, portfolio manager at Medici.
“On March 8, 2023, writes the rating firm DBRS Morningstar, the SVB released its quarterly results, indicating that it had sold 21 billion securities for a loss of 1.8 billion (after tax) and that it was trying to raise additional capital. A run on the banks ensued, and on Thursday, March 9, $42 billion in deposits were withdrawn from the bank, or about 25% of total deposits, and the pressure from the ensuing shortage of liquidity resulted in bank failure. »
This institution has the distinction of having a concentration of clients from the techno, life sciences and venture capital sectors, sectors that were running at full speed during the pandemic and who made imposing deposits at the SVB. With rising interest rates, financing is more expensive, and sources of funds are becoming scarcer. SVB customers may need their money. However, 95% of deposits were not FDIC-insured because they exceeded the US$250,000 limit.
“A Canadian bank has a much more diverse customer base. In the United States, the business model can be more specialized,” points out Gabriel Dechaine, analyst at National Bank Financial.
It has a concentration of customers from techno. Deposits come from a limited number of customers with considerable means. It also failed to hedge against interest rate risk. “Interest rates were really low in 2021. It was problematic to put money in long maturities,” condemns Pierre-Olivier Langevin. Long-term securities react strongly to a change in interest rates.
Last weekend, the Federal Reserve, FDIC and Treasury responded collectively by ensuring the repayment of all deposits from troubled banks. The Fed has also set up a credit facility available to financial institutions, which could in turn experience a liquidity crisis if their depositors were to claim their money in large numbers.
The president wanted to reassure Americans by telling them that their bank deposits were safe. They will be insured at no cost to taxpayers. It is the fees charged by the FDIC to financial institutions that will foot the bill. He specified that the institutions in difficulty will not be saved by the government, contrary to the crisis of 2008. Their leaders have also lost their jobs. Shareholders and holders of debt securities of these institutions should therefore expect to lose their stake. He also promised to strengthen banking regulations.
On Sunday, the FDIC took over Signature Bank of New York (assets approximately $110 billion). Last September, a quarter of these deposits came from the cryptocurrency sector, reports Reuters.
On Monday, regional banks like San Francisco’s First Republic (US212 billion in assets) were under pressure. First Republic has in common with the SVB to have a large percentage of uninsured deposits.
But for Mr. Langevin, the worst is probably over. “From a factual standpoint, the crisis is possibly over. Regulators have taken the necessary steps. Banks have all the necessary tools to have liquidity in the event of an outflow of deposits,” he believes.
DBRS doesn’t see a stake for large U.S. banks either. “In our view, U.S. bank balance sheets remain strong, with ample levels of liquidity and deposits that are not prima facie likely to be withdrawn quickly. »
They are potentially considerable. According to Goldman Sachs, the Federal Reserve will take a break from tightening its monetary policy. Last week, the market was instead expecting an interest rate hike. US inflation figures will be released on Tuesday.
For Mathieu Marchand, independent economist from Quebec, the events of the last few days demonstrate the dependence of the American economy on low interest rates.
“This is the first bubble from a pot of boiling water. If interest rates remain at their current level for a long time, the adjustment in asset prices will be downward and we will witness a crisis in asset values. »
“As of Friday,” he continues, “the soft landing scenario is dead. When a bank explodes, there is no question of a soft landing. »
The events of the past few days could also mark the start of a recession in the United States and with the recession, the disappearance of inflation, says Mr. Marchand.
“I cannot predict the future, but it is possible that the recent banking setbacks will affect the scenario of a soft landing for the American economy,” agrees Gabriel Dechaine, of National Bank Financial.
