The Silicon Valley Bank failure is a wake-up call for banks

The failure of Silicon Valley Bank (SVB), the first US bank to fail since 2020 and the largest since 2008-2009, has rocked the banking and finance world. With a legacy of $209 billionthe bank has focused on banking for the technology industries. This operating model, which has historically delivered strong revenues and rapid growth, has resulted in a decrease in sponsorship funding and an increase in cash burn at startup, resulting in an outflow of deposits from the bank.

To deal with the cash outflow, the bank had recently sold a large portion of its available-for-sale securities at a loss and attempted to raise additional capital to compensate, but this resulted in a loss of confidence and a bank run. . . This also led to a significant sell-off in the banking sector in the US and beyond, as investors feared other financial institutions would have significant unrealized losses on their balance sheets due to significantly higher interest rates.

However, according to experts, US banks generally have sufficient liquidity and stable funding and capital to weather this market turmoil. Some banks are expected to reposition themselves by selling lower-yielding stocks and reinvesting the proceeds in higher-yielding assets, thereby incurring losses. As analyzed by morning starthe banks covered by the universe are able to absorb these potential losses with income and strong capital buffers.

Why Did Silicon Valley Bank Fail?

There are some very specific circumstances surrounding the insolvency of SVB, but it is clear that the sudden rise in interest rates was a key factor. Rapidly rising interest rates, coupled with rapid growth and a very limited business customer base, have resulted in deposit balances well above the legal limit. Federal Deposit Insurance Company.

On the other hand, experts say that bank balance sheets in the US remain strong, with ample liquidity and stable funding. Deposits remain higher than before the pandemic, with a loan-to-deposit ratio of 69% in 2022, which is still higher than the pre-pandemic level of 76% in 2019. However, these deposit funding levels could see an increase of the deposit beta when interest rates rise.

After the insolvency of the SVB e signature bankUS regulators announced that all depositors of both banks will have access to their capital.

Is insolvency a problem for European banks?

We quote an expert comment Emiliano CarchenOliver Wyman Financial Services Partners:

“The SVB does not represent a wake-up call for the European banking system. The California bank had unique characteristics, such as the size of the deposits (making them nearly exempt from guarantees and more exposed to bank runs), the concentration/type of depositors (not just corporates but almost all tech players in the valley) and less stringent regulatory requirements than European ones. This has made SVB’s profitability ‘liability-driven’ in contrast to universal and diversification banks which are structurally ‘asset-driven’ and benefit from the spread widening (beta of assets > beta of liabilities). SVB, on the other hand, has grown and thrived during the negative interest rate era.

However, the bankruptcy of the SVB can help us understand the magnitude of the changes that the macroeconomic scenario is bringing to the banking system and underscores the importance that financial dynamics and demand position models, IRRBB, ALM, funding strategy, etc. They must have in the maintain the excellent profitability of 2022 for years to come. To address this shift, the integration between industrial and financial planning needs to be improved and there needs to be a more fluid dialogue between the business, risk and finance functions in relation to the scenario and possible strategies for responding (e.g. by adopting “stress” Scenarios generally considered credible by these functions).

This will be particularly important for banks whose profitability is more exposed to discontinuous events that will impact the system in the coming months, such as those whose interest rate margin is more dependent on securities/TLTRO, or those with a higher incidence of wholesale financing. In addition, there are financial players whose business model has been shaped and grown during the hyper-liquidity regime of recent years and who – for the first time – have to face this new economic phase.”