There would be a bank, but there would be money – Newspaper Kommersant No. 42 (7487) dated 03/14/2023

The bankruptcy of Silicon Valley Bank in the US will lead to tightening of banking supervision in the US and to the monetary policy of the US Federal Reserve. The bank went bankrupt in two days, all the problems from its bankruptcy were solved yesterday by the authorities in just a couple of hours by deliberately excessive methods. In order to avoid a worldwide panic, neither bank depositors nor the rest of the world will lose anything “short” – but money around the world will become a little more expensive.

The bankruptcy of one of the most important institutions in the US venture investment market – Silicon Valley Bank (SVB) and its group – led on Monday to significant shifts in US domestic financial policy. U.S. President Joe Biden on Monday vowed to take “all necessary measures” to resolve the banking crisis surrounding the SVB bankruptcy, as well as further strengthen banking regulation, which was partly loosened during Donald Trump’s presidency. This, in particular, is about lowering the threshold for classifying a bank as systemically important (which implies tighter supervision) from $50 billion to $250 billion – these amendments were approved in May 2018. The appeal was made against the backdrop of falling shares of not only American, but also European banks.

Outwardly, what was happening looked like a rather big event in the global financial market, affecting not only the United States. On Monday, an emergency meeting on the banking crisis was held not only by the Fed, but also by the German Bundesbank, while the Swiss regulator said that it was “closely monitoring the situation.” In London, the HSBC group announced the acquisition of the British subsidiary of SVB for a symbolic sum of £1. Even the day before, the joint financial group of SVB and the Chinese Shanghai Pudong Development Bank, working in the financial market of China and with local startups, stated that nothing threatens its work, SVB problems will not affect it. However, even short-term turmoil in global financial markets was tangible, and in the long term, the future decision of the United States to lower the threshold for identifying systemically important banks (SVB would apparently be subject to tighter supervision of the $250 billion asset threshold in 2023-2024 is simply force of economic growth and inflation) will indirectly tighten the Fed’s monetary policy – despite the fact that the event that will cause these consequences does not in itself look like a tragedy or a catastrophe.

Recall that last Friday Silicon Valley Bank – the largest bank focused on lending to startups in California and the 16th largest bank in the United States (at the end of last year they were $ 209 billion), came under the control of the Federal Deposit Insurance Corporation. Bankruptcy happened extremely quickly, in fact – in two days. To increase liquidity, the bank’s management sold part of the bonds at a loss (it arose due to the increase in Fed rates and the decrease in the cost of securities with lower yields to maturity) and announced the attraction of additional capital – this decision, announced on Wednesday, was the signal to flee, by Friday morning the outflow of funds reached a peak (about $42 billion), which led to the closure of the bank as a result of the classic bankrun – “bank run”.

However, the classic in what was happening was, apparently, only the form. Over the weekend, the Federal Deposit Insurance Corporation (FDIC), the Fed and the US Treasury considered mechanisms to protect the remaining depositors – as a result, by Sunday evening, Treasury Secretary Janet Yellen (reportedly after consultations with Joe Biden) approved a full compensation for the losses of SVB depositors – it is assumed that this will happen at the expense of the deposit insurance fund (under normal conditions, it covers only deposits up to $250,000). A similar procedure for a full refund of funds on deposits was promised to depositors of another large bank – Signature Bank, whose operations were stopped on Sunday. Its assets were estimated at $110.4 billion, the volume of deposits – at $88 billion (most of them were also not insured). In both cases, management will be removed from management, and shareholders and some creditors will not be able to return their funds, the Fed said in a statement. However, at least in the case of SVB, even before the FDIC decision, it was unofficially known that the bank was able to return 80% of deposits in it without problems – this is a very high level and, in general, does not even look like a real bankruptcy. This is mainly due to the very specific business model of SVB: it is rather not a bank, but a financial group that provided Silicon Valley and its startups (in the documents, SVB management, whose president Tony Maiopoulos previously headed the Fanni Mae agency, and CEO Gregory Baker was even a member of the board of directors of one of the Fed banks claims to have worked with 65% of all startups in the US in 2022) integrated financial services – from loans to new technology firms to expensive mortgages for wealthy startup founders in California. The main problem of the bank, which he failed to cope with, was large investments in US government debt on the eve of a cycle of rising interest rates and a liquidity crisis due to the issuance of long loans against short deposits. However, this is not even the point, but the speed of the bankruptcy process: although SVB was criticized for a rather archaic level of digitalization, its clients were withdrawing money from the bank as quickly as only panicking California investors do.

Despite the fact that the current outflow of funds affected banks closely associated with lending specifically to start-ups (and in the case of Signature Bank and another bank that went bankrupt last week – Silvergate Bank – with the crypto industry), Janet Yellen did not attribute SVB’s bankruptcy to problems in the technology sector. , but with the loss of the market value of securities “in the environment of an increased discount rate.”

These risks, previously not noted in the Fed’s statements, required urgent and even outstanding measures from the regulator – banks that attract depositors’ funds were offered additional liquidity on more lenient terms. And to allocate additional financing, an additional fund was formed (Bank Term Funding Program, BTFP), which will be able to provide loans to banks for up to one year secured by high-class securities (in particular, government bonds), while the collateral will be calculated from the face value of the securities. It is assumed that this will allow banks not to sell the securities themselves, fixing losses – such a mechanism would probably allow SVB to avoid bankruptcy. In many ways, the Fed saved itself in this way from the spread of banking panic: already on Friday, rumors began to circulate about the problems of the large First Republic Bank (on Monday it confirmed that it received adequate support from the Fed and JPMorgan Chase) and PacWest bank (it did not receive support, although there were also many worked with startups, but, apparently, does not need it).

Market participants also revised their expectations for the Fed’s monetary policy – previous comments by the head of the regulator, Jerome Powell, indicated a rather tough position and a willingness to raise the rate not only in March and, possibly, not only by 0.25 percentage points, but now investors are laying 40- percentage probability of no further rate hikes (the next meeting will be held next week), a week ago the probability of a 0.5 percentage point increase was estimated at 70%. The Fed’s decision to expand access to liquidity and the regulator’s willingness to accept paper at face value, rather than market value, are significant shifts, given that banks have accumulated about $600 billion in unrealized losses on government bonds and mortgage securities due to rate hikes, Capital Economics notes. . In the case of a rational assessment, these measures should be enough to stop the risk from spreading to other banks, the center notes, but they also point to the acceleration of the bankruptcy process “in the digital age” and the possible consequences of panic in the market.

It should be noted that the Fed and the US leadership were forced to respond to the events, although major, but hardly threatening, de facto with main-caliber guns: full coverage (albeit moderate) of SVB and Signature losses, which was not provided for by the rules of the system, was cheaper and the mass panic behavior of ambitious startup staff in California; and the worldwide banking panic. The state of the global financial system – strong, but ready for any catastrophe right now – no longer allows solving such problems except with clearly excessive resources.

Tatyana Edovina, Dmitry Butrin