SVB has been hogging the headlines for all the wrong reasons as it suffered a dramatic collapse, forcing the government to intervene and the trading to stop. In fact, SVB has made it to Forbes’ list of America’s best banks in 2023 (post published on 6th Mar 2023).
Who is Silicon Valley Band (SVB)?
This is the business description taken from QuickFS.
SVB operates in 4 segments and is an integral of the US venture capital ecosystem in Silicon Valley.
Here is some info extracted from a recent Bloomberg news article:
On 12 March 2023, we have the following good news:
Depositors will have access to all of their money starting Monday, March 13. No losses associated with the resolution of Silicon Valley Bank will be borne by the taxpayer.
Source: https://federalreserve.gov/newsevents/pressreleases/monetary20230312b.htm
Despite the “bailout” by the government, I have my concerns.
SVB and SNYB have been saved in part by the Federal Government. The deposits will be honoured, the management will be replaced and the investment has turned nil. President Biden assured the public in an address that the taxpayer will not be paying for any losses associated.
This seems to be an almost perfect resolution. Can we close this chapter and move on?
My Investing Muse
Regional banks are facing a battle of confidence. With SVB’s bailout, the customers’ deposits will be honoured and backed by the government. This meant that the customers could continue their work but unfortunately, the public’s confidence seems to be leaking.
From Twitter user The Kobeissi Letter on 13 Mar 2023
U.S. Regional Bank Stocks Now:1. Western Alliance, $WAL: -75%2. First Republic, $FRC: -65%3. Zions Bancorp, $ZION: -43%4. PacWest, $PACW: -41%5. Comerica, $CMA: -33%6. Fifth Third, $FITB: -20%Markets are betting that SVB's collapse broke the regional bank system.
The big banks are reporting a surge in queries to transfer funds.
My concerns are as follows:
Regional Banks losing customers to Big Banks like CitiBank, Bank of America, JP Morgan Chase and Wells Fargo. Some customers are losing confidence and are moving their funds out to the Big Banks.
If this persists, some of the regional bank outlets will be forced to shut down, leading to closures, loss of jobs and lack of banking services in selected areas.
This implies that people in some towns may need to travel further for their banking needs. This may spark a surge of people turning to electronic banking but there would be folks who prefer to hold cash on hand.
This will further consolidate the influence of the Big Banks, consolidating the power that they have in the market.
SVB is a special bank whose speciality is in the startup market. Many of these startups need a range of banking services from savings, and lines of credit, unique to the startups. I doubt that the Big Banks would be able to provide these at the same customer service and competitive rates as they are not in the startup business.
If there is no one to step into the niche like SVB, the startup and venture capital (VC) ecosystem may have to end up with lesser support from the banking sector. The USA has been a leading source of innovations and disruptive technologies. If this ecosystem is under-supported, the US may see a decline in innovations in the future.
The other banks could be willing to step in to support the startup market, but they may end up providing the services at higher rates and charges as they lack experience in this sector. This would increase the costs to startup, increase the burn rates and force shorter timeframes for them to deliver.
There should always be a clear line between the private sector and government agencies. The government has entered the market to bail out a few companies (AIG & GM for example) in times past. This is deemed needful as the collateral damages could well spread beyond 2 banks.
In a free market, companies rise and companies fall. It is part of business as usual. With the US government entering to help, they have set precedence - for the market to ask for the government to help. This should be an exception, instead of the norm. The grounds and criteria to qualify for such intervention need to be made clear.
The current insured amount limits of $250K seem dated and a refresh may be necessary. In fact, the government can consider using a percentage instead of a hard limit so that they can cater adequately as the business grow. This could add costs to the banks but they would be able to charge this back to the businesses.
Why save the customers with deposits and not the shareholders? This does seem lopsided. Both of them should expect some risks but why save one and not the other?
If the government continues to do such a bailout, there could be concerns from international buyers of US government bonds.
The debt of one is the asset of another. Someone will be paying for this. The Biden administration has mentioned that the taxpayers will not be paying for this. It will be interesting to know who ends up footing the bill.
I am not familiar with the banking sector but I have concerns that there could be other banks in a similar predicament like SVB. Would there be more closures or bank runs in the coming days? It is left to be seen. Let us research accordingly before we invest.
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