Silicon Valley Bank (SVB), the 16th-largest bank in the US, collapsed on March 10, followed by the closure of Signature Bank last Sunday. The collapse of the SVB marked the largest failure of a US financial institution since the height of the financial crisis almost 15 years ago.
Janet Yellen, US Treasury Secretary, claimed on Sunday that the bank's collapse is due to “a higher interest rate environment”, instead of “the problems of the tech sector”. On Monday, US President Joe Biden declared the US banking system “safe” and promised stricter bank regulation in the future.
As worries about a “systemic contagion” spread across the venture capital and technology industries, we talked with Hu Jie, professor of Shanghai Advanced Institute of Finance, in an exclusive interview in which he shared insights into the causes and impact of SVB's fall.
The following are some highlights of the interview.
Question: Do you agree with Yellen’s viewpoint? What do you think are the main reasons for the collapse of the SVB?
Hu: I partially agree with her statement that it is not due to technology companies, but I think it is one-sided for her to put all the blame on rate hikes.
The Fed's adjustment of interest rates exerts an influence on all banks, which means SVB is not the only bank whose assets depreciate. In my view, the homogeneity of its depositors is the direct reason behind its demise. The main depositors of SVB are technology entrepreneur companies that heavily rely on financing as their funds from businesses are not enough. When the financing environment becomes worse due to the raised interest rates and tightened monetary policies, these start-ups would face a tough situation in finding financing sources.
Question: What's the impact of the collapse on the technology sector?
Hu: When the incident happened, the US regulators did not guarantee to protect all deposits immediately. Legally, the US regulators have no obligation to keep all deposits safe and are only required to guarantee a maximum of 250,000 US dollars. If no backing were there for these depositors, the consequence will be a loss of the unprotected portion of their deposits, which is basically 97 percent of said deposits, possibly leading to more than 30,000 companies running out of money.
As a result, most of them would probably stop production and then go bankrupt, and other related companies would be affected. It would be a disaster for tens of thousands of companies in Silicon Valley and make the US innovation center unbearable.
Of course, it is fortunate that the US regulators eventually guaranteed to protect the money for these depositors, avoiding a possible worst case. In fact, although it did not happen, many technology stocks were under pressure during the process. Everyone in the world is now watching how this matter would evolve.
Question: What's the impact of the SVB's demise on the world financial market? Will it escalate into a "systemic crisis" and become the next "Lehman Moment"?
Hu: We can see its impact on the world from two perspectives: the banking system, or the financial system in a larger sense, and the stock market.
It seems that the impact on the banking system is manageable. SVB is an isolated case. Although there are still several banks like the SVB case, it is not a general situation among the nearly 10,000 banks in the US. Fear will not spread rapidly over a wide area under good control. Now, as you can see, the measures issued by the Federal Reserve and the Treasury Department address the concerns of depositors and curb the impulse of customers from other banks to withdraw their deposits in a panic. Therefore, I think it is not possible for its downfall to escalate into a systemic crisis.
However, it does not mean that the impact on the secondary market has subsided. The shareholders of SVB are suffering from financial losses. They will probably sell the bank at a very low price. Signs are already shown in its stock prices. It is definitely bad news for the banking sector.
Question: Do you have any advice for global companies and stockholders about the current situation?
Hu: The first lesson from this is for all banks. Even if you are operating normally, there are still a lot of potential risks that deserve close attention. SVB, for example, is qualified in terms of the quality of its assets. However, the trigger for SVB's collapse lies in its cash and liquidity management. Therefore, there are a lot of potential risks that may not seem so fatal in normal times. But these risks will be fatal once a problem breaks out. I think people around the world should pay attention to the health of their banks.
The second lesson is for technology companies. One problem reflected in this incident is that technology companies are highly dependent on financing. But the issue cannot be solved immediately. Still, it is possible to consider some countermeasures to alleviate the problem. For example, do we really need to gather all the enterprises with strong financing needs into one bank?