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The bankruptcy of the American bank SVB – the essence of what happened

The bankruptcy of the American bank SVB – the essence of what happened

Today the whole world is discussing one of the resonant events on a global scale - the bankruptcy of one of the major US banks - Silicon Valley Bank (SVB), which was announced at the end of last week.

Well , bankruptcy is fine ! But everyone is interested in the question of why this happened and what it means.

Briefly, in a simple way, we will reveal the essence of what happened.

There was one bank in the USA called SVB. Its capitalization has been constantly growing from year to year (at the beginning of 2023 it reached about 200 billion.$) and this was mainly due to the segment that he served – IT sphere.

IT has recently been in priority industries in terms of earnings and profitability, and therefore everything acquired by overwork had to be stored somewhere. Plus, Silicon Valley venture investors also participated in these savings.

So they accumulated all their cash in SVB bank for deposit, even under the minimum level of profitability (up to 1% per annum). More than $175 billion lay in depositors' deposits.

There was a reason that the bank had a name - Silicon Valley.

bankruptcy of the American bank SVB – the essence of what happened

So, the bank's liabilities were secured by Silicon Valley funds, but assets, i.e. where the bank invested this money for its earnings, there were mainly long positions - securities (bonds) of the US government (US Treasuries) and a debt mortgage with collateral in the form of real estate.

With the Fed's discount rate of 0-0.25% existing at that time, SVB did not see any commercial benefit for itself in short positions, and this is logical. Securities of the US Treasury and mortgages for long-term loans gave more - 1.5%. But, we note, this is a long-term.

Time passed inexorably. Inflation in the US began to go off scale, and the Fed, in its usual manner, began to solve these problems by raising the bank discount rate. And today it is already 4.75%.

And here is the key moment and the denouement.

The trigger was a one-time and massive outflow of all the money that IT companies kept on deposit accounts in VSB.

Why did everyone need to take their money at the same time? Well, times are already in IT, perhaps not the same as before, and current needs have grown. And in general, no one should be accountable for this on the part of depositors.

But, it would seem, what is the problem, to sell long mortgage securities and the US government, and pay for the money received for all its problematic obligations.

Everything would be fine, but over the past year and a half, the US Federal Reserve has raised the account the interest rate to such a level that today these bonds owned by SVB could be sold for only half the price (in rough terms). The price today for them (with similar reliability) is about 5%, not 1.5%, as two years ago.

the bankruptcy of the American bank SVB – why did this happen

As a result, the real liabilities of SVB no longer corresponded to the real assets at the time of the need to settle their debts.

As a result, these circumstances related to the inability to pay off their obligations, and led to the bankruptcy of SVB.

Against this background, even one of the USDC stab coins, which is tied to the US dollar and is the brainchild of Circle, which also held part of the reserves for this token in VSB (about $ 3.3 billion), was shaken. The drawdown on the USDC at the time of the bank's bankruptcy reached below 90% of its nominal value of $ 1.

Against the background of the current situation around VSB, according to the latest data, about 15% of the obligations will be repaid from the American FDIC deposit insurance system, but the remaining one, until Monday morning, was in a suspended state.

And here the US Federal Reserve system comes to the rescue, with the slogan "We don't leave our own in trouble!». And charges the printing press with another portion of bucks for the benefit of his fatherland.

So much for the tightening of monetary policy, which has been so actively discussed around the world lately.

Against this background, it is already rumored that in order not to injure the American banking sector, the Fed may leave the discount rate at the same level on March 22.

All these events instantly affected the markets – everything went into the green zone. The value of BTC has already exceeded the level of $26,000. The dollar is still moving into a phase of its decline.

But do not flatter yourself. This is just a deferred scenario for the Fed to achieve its goals, due to an unforeseen situation.

How long was it not foreseen…!?

If today the Fed's main goal is to withdraw dollar liquidity from the financial system in order to combat inflation, then why would it not leave everything as it is in this case.

The recession for the quarter, at least, is canceled. But the inflation of the dollar is gaining momentum.

The current situation in the US banking system is by no means unique and does not have any special differences, taking into account the comparability of real bank assets with their sources (liabilities).

Any bank, in any jurisdiction, with distressed assets are in a similar situation - it's just that the trigger hasn't worked yet (the trigger mechanism, as in the case of VSB).

The bankruptcy of the American bank SVB – the essence of what happened –  Somehow!

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