Silicon Valley Bank collapsed on Friday morning due to a run on the bank and a capital crisis. California's regulators closed down the tech lender and put it under the control of the US Federal Deposit Insurance Corporation. The FDIC is acting as a receiver, which typically means it will liquidate the bank's assets to pay back its customers, the US media reported.
There were general reasons behind the run on Silicon Valley Bank, such as the sluggish economy, which led to weak deposit growth and affected loan quality. But the last straw breaking the back of the camel is that half of the bank's assets are in long-term bonds, such as Treasury bonds, which have taken a dramatic turn recently.
The one-year Treasury bond yield, or interest rate, for example, had been less than 0.1 percent for long until October 2021, but then rose linearly and is now standing at 5 percent, thanks to the Federal Reserve's attempt to control inflation by raising interest rates. But this is a big problem for some holders of long-term government debt like Silicon Valley Bank.
Many investors are now opting for safer government bonds for higher current yields, rather than depositing them with banks. But when depositors demand their money, some small banks that have their assets in long-term bonds can only raise money by selling liquid assets such as government bonds.
The yield on the outstanding Treasury bonds that Silicon Valley Bank bought in its early years was much lower than that of today. That means the value of the bank's Treasury assets, which had already fallen sharply without being sold, would not bring much cash to the bank if they are sold now. But the bank has no choice, slipping into a vicious cycle that leads to bankruptcy soon.
Statistics show that there are about 10 other US banks having lower net interest margins than Silicon Valley Bank, which is unlikely to be the only US bank to collapse this year.
But there are differences between 2008 and today. The root cause of the subprime mortgage crisis in 2008 was the political operation of the Democratic Party to promote "home ownership", which resulted in a large area of decline in the quality of basic loans, and was a chain reaction of the bursting of a big social bubble. Today, most US commercial banks, particularly the giants, have better asset structures than Silicon Valley Bank. They have more diverse sources of assets and funding, and have been "trained" by regulators through their repetitive stress tests to provide savers with considerable confidence.
Therefore, as a victim of the Federal Reserve's macro-control actions, the failure of Silicon Valley Bank will not trigger a new Lehman crisis, and there should be no systemic risk to the US banking industry in the short and medium term. But it is still worth keeping a watchful eye on the panic in the industry that the bankruptcy has caused, as well as its implications for tech companies and the venture capital industry.