News of California-based Silicon Valley Bank (SVB) collapsing recently hit global headlines, sparking concerns from people outside the U.S. about the impact on regional financial markets.
SVB’s stock had plunged to less than one-fifth of its value and caused US$55 billion (S$74.09 billion) in losses to Wall Street’s top four banks within the day before regulators took over.
Second & third largest bank collapse in U.S. history
With US$209 billion (S$281 billion) in assets, SVB is the second-largest U.S. bank collapse in history, behind only Washington Mutual during the 2008 global financial crisis.
Shortly after SVB’s collapse, New York regulators shut down another bank, Signature Bank.
Signature Bank is the third-largest U.S. bank collapse, with assets worth US$118 billion (S$159 billion).
Caused ripples worldwide
While U.S. authorities scramble to control the situation, most Asia-Pacific financial markets, including Singapore’s, fell immediately after opening for the week yesterday (Mar. 13).
The situation prompted Singapore’s financial regulator Monetary Authority of Singapore (MAS), to clarify in a media statement that Singapore’s banking system remains “sound and resilient” as it has “insignificant exposures”.
Singapore’s STI index closed at 3,132.37 yesterday, representing a 1.4 per cent loss.
The index fell beyond the 3,100 mark after opening today (Mar. 14) but rallied back to hover at around 3130 by mid-day and for the rest of the day.
What is SVB, and why has its collapse caused turmoil in the world?
Silicon Valley Bank was founded in 1983 and branded itself as the go-to bank for tech startups, specifically those with venture capital investment.
What is venture capital?
Venture capital (VC) is a form of financing provided mainly to startups and small businesses that the investor believes to have long-term growth potential.
In exchange for funding, these businesses often give up complete control over the company, and VC investors would have a say in the company’s direction.
For the VC investors, if the company doesn’t succeed, they might lose all their money.
SVB offered venture debts
SVB offered venture debts. In short, they provide additional loans to startups that VC investors have already invested in.
To lure in clients, SVB also provided a “one-stop shop” for startups, creating solutions for their financial needs, and also took care of their executives with private banking support.
Most of SVB’s clients not only borrowed money from SVB but also deposited all their money, as well as their companies’ monies.
By 2021, it claimed its clients accounted for nearly half of all U.S. venture-backed startups.
Why did SVB fail?
Banks don’t usually keep deposited monies, but invest most of them for better returns.
For SVB, a significant portion of their monies was invested in long-term securities such as government-issued bonds and mortgage securities.
However, the recent aggressive interest rate hikes by the U.S. federal government have caused borrowing money to become more expensive, therefore VC investors have reduced cash flow, resulting in many of their clients having to use their companies’ reserves deposited in the bank to fund operations.
The interest rate hikes also cut deep into SVB’s bond portfolio.
SVB’s parent company, SVB Financial Group, announced on Mar. 8 that it would undertake a US$2.25 billion (S$3.03 billion) share sale after selling US$21 billion (S$28.29 billion) of securities from its portfolio at a nearly $2 billion (S$2.69 billion) loss, to shore up its finances.
This further spooked customers and led to them withdrawing their money from the bank, causing a bank run.
Tech-savvy clients withdrew money too fast
While analysts said people were right to “freak out”, many were caught off guard by how fast SVB’s clients bailed.
Since most of SVB’s clients are from tech startups, they are tech-savvy enough to withdraw everything with a few clicks of their mouse buttons. Without the buffer of a bank teller or at least a phone call, SVB had very little time to react.
It didn’t help that VC investors called others to jump ship together.
So as a Singaporean, should I be worried?
Multiple analysts had told the public that they shouldn’t be worried, as SVB’s collapse will have a limited impact on Singapore’s local banks as they adopt more traditional methods of lending monies.
DBS, UOB and OCBC have since clarified that they either do not have any exposure or do not have direct exposure to SVB’s collapse.
Temasek Holdings have also claimed that they do not have direct exposure to SVB.
The U.S. government acted quickly, intervening and assuring customers that their deposits would still be accessible.
So… I don’t have to be worried, right?
While there is still a risk of a “contagion” effect, which means that SVB’s collapse might lead to distrust in the tech industry, some analysts do not think it’s the most serious issue at play here.
There are concerns that SVB’s collapse is merely the start of the burst of the” everything bubble”.
When this “superbubble” bursts, the world might see a crisis similar to the 2008 Great Recession, or worse.
The “everything bubble”
The everything bubble is not a new idea. Coined by Wall Street bankers years ago, the term became prominent when the U.S. significantly eased financial conditions to combat the economic impact of the covid-19 pandemic.
Many prominent people in the finance industry, including investing legend Jeremy Grantham, warned about the brewing “superbubble”, where near-zero interest rates and U.S. Federal government intervention had pushed investors towards riskier investments, allowing unsustainable business models to thrive on cheap debt.
The reason why they called it an “everything” bubble is that, literally, everything became overpriced. From bonds to equities, housing to commodities, even cryptocurrency had seen record levels during the pandemic.
U.S. housing bubble burst caused Singapore’s worst recession in 2008
The bursting of a housing bubble due to cheap credit and lax lending standards caused the U.S. financial crisis in 2008.
By the third quarter of 2008, the crisis and its ripple effects had greatly stressed the Singapore economy, causing it to be the first country in East Asia to succumb to recession. It was hailed as Singapore’s worst-ever recession.
MAS watching situation closely
In its statement on Monday (Mar. 13), MAS said it is closely monitoring the domestic financial system.
“MAS stands ready to provide liquidity through its suite of facilities to ensure that Singapore’s financial system remains stable and financial markets continue to function in an orderly manner,” MAS said.
MAS is also in close touch with Enterprise Singapore to assess any potential impact of international developments on Singapore startups, including those with operations in the U.S.
While the initial feedback indicates that the impact is limited, MAS and other government agencies will continue to monitor the situation closely for any signs of stress.
Top image via Google Maps Jeff Aguero and Maiko Douglass