The Silicon Valley Bank (SVB) closed down within 48 hours and was officially managed by the Federal Deposit Insurance Company (FDIC) on March 10th, local time, which shocked the international financial market.
By the end of 2022, Silicon Valley Bank had assets of about US$ 209 billion and total deposits of US$ 175.4 billion, ranking 16th in the United States. Moreover, SVB’s parent company, Silicon Valley Financial Group, was also a listed company (stock code SIVB), and its market value once ranked among the top 10 banks. The bank is not only one of the largest local banks in Silicon Valley, but also very active in the investment field of high-tech start-ups, many of which are customers of the bank. Enterprises that need financing get loans or even equity investment from Silicon Valley Bank, and enterprises that complete financing or go public deposit their funds in Silicon Valley Bank. According to information, more than 1,000 start-ups have deposits in SVB, accounting for about 50% of start-ups in Silicon Valley in the United States, and basically all companies have deposits exceeding the insurance limit of $250,000 provided by FDIC. Due to the liquidity problem of SVB, Silicon Valley Financial Group announced on March 9 that it would sell common shares and preferred shares to raise more than 2 billion US dollars. As soon as the news came out, the shares of Silicon Valley Financial Group fell 60% in one trading day, which dragged down the entire banking sector and even led to the overall decline of the market that day. However, SVB’s self-help behavior still ended in failure, and eventually it could not escape the fate of being entrusted, becoming the largest American bank that failed since the international financial crisis in 2008.
The reasons for the collapse of Silicon Valley banks are very typical. During the period of quantitative easing and ultra-low interest rate in the United States, the bank’s deposits from high-tech companies in Silicon Valley surged. In addition to expanding its loan business, the management decided to invest most of its capital in holding mature assets (HTM) to earn spreads. When the Federal Reserve changed its course and raised interest rates aggressively to overcome inflation, the price of US Treasury bonds fell rapidly, which also worsened the financial situation of companies in Silicon Valley. Many depositors began to withdraw their deposits from Silicon Valley banks, which caused problems in the liquidity of banks. In order to cope with depositors’ withdrawals, the bank had to change the bonds originally marked as holding maturity into tradable ones, and thus had to disclose the huge losses on the books. Depositors are worried that the loss of SVB’s capital will harm their own deposit safety, and they have joined the ranks of withdrawals, so the worst nightmare of banks — — Run. In order to cope with the run, banks were forced to sell more bonds and suffered more losses, which formed a vicious circle and eventually led to the bankruptcy and trusteeship of SVB.
The SVB incident has had a certain impact on the American financial system. On March 10th, US Treasury Secretary janet yellen attended the hearing of the Ways and Means Committee of the House of Representatives, saying that he would pay close attention to the development of the situation and avoid a chain reaction. According to the analysis of the net interest margin (NIM), there are about 10 banks in the United States that have liquidity risks similar to SVB. However, it is worth pointing out that this risk is mainly caused by the exhaustion of liquidity. Unlike the large-scale emergence of toxic property in 2008, it should not cause serious direct losses to the US financial system. The main negative impact may be more concentrated in silicon valley startups that SVB focuses on. On the one hand, enterprises with large deposits in SVB may face serious financial losses and even fail to pay wages and rent in time; On the other hand, startups that used to rely on SVB for loan support to develop their business will have a broken capital chain and their business cannot continue.
If we interpret the SVB incident from a broader international political and economic perspective, we will find that the financial operation mode that the United States has long relied on is facing difficulties.
American finance has been in deficit since the Clinton administration, especially after the international financial crisis in 2008, and the deficit scale rose rapidly from $162.8 billion in fiscal year 2007 to $1,417.1 billion in fiscal year 2009. After the outbreak of the COVID-19 epidemic, the fiscal deficit of the United States directly doubled, reaching $3,131.9 billion. In order to make up for the huge fiscal deficit, the US government had to issue treasury bonds on a large scale, and directly capitalized the deficit through the quantitative easing policy of the Federal Reserve, printing trillions of dollars into circulation. It is this practice of releasing money that gave birth to this round of quite serious inflation in the United States. In the past year, the Fed had to take radical measures to raise interest rates in order to curb inflation. In 2022, the Federal Reserve raised interest rates seven times in a row, totaling 425 basis points, the fastest rate hike in the past 20 years. The rapid interest rate hike has caused the yield of US Treasury bonds to rise rapidly, while the high financing cost has worsened the financial situation of a large number of enterprises. These two forces together constitute the background of the SVB incident.
As the country with the strongest economy in the world, the United States has spread its domestic financial risks to the world by issuing treasury bonds on a large scale and manipulating dollar interest, forcing other countries to pay for the domestic economic problems of the United States. Therefore, although the United States printed a large number of dollars into circulation in the past, it did not cause serious inflation in the United States. As the most liquid and safe investment variety in the world, US Treasury bonds have provided American enterprises with extremely low-cost financing channels for a long time, which is undoubtedly the institutional dividend and unfair huge seigniorage brought by the hegemony of the US dollar. In essence, it uses the international monetary status of the US dollar to exploit other countries in the world, and it has always worked. However, in recent years, the United States has gone further and further on this road of bullying, not only failing to control it, but intensifying the drama of taking advantage of it. The discontent trend of resisting the unreasonable harvest of dollar hegemony has gradually formed around the world. The "financial double spring" of the Federal Reserve printing dollars and the US Treasury issuing treasury bonds has gradually failed, and the "bonus hunter" has begun to bite itself. Once the international subscription of US debt continues to be sluggish, the Fed is forced to expand its balance sheet and print more US dollars to buy US Treasury bonds. However, due to the decline in the international reserves and circulation of US dollars, more printed US dollars will enter the circulation field of the US economy, thus pushing up commodity prices and causing serious inflation. As a result, the risk of US debt and US dollar spiraled up, further weakening US financial hegemony.
Although the SVB incident may not cause an international financial crisis like that in 2008, it clearly reveals that the deep contradictions in the American financial operation model are intensifying. This incident is not so much a technical mistake in the American financial system as a footnote to the deep crisis facing American financial hegemony.
(This article Source: Economic Daily Author: Qi Chen Xue Jing Author is the director and professor of Tsinghua University Sino-US Relations Research Center; Special research fellow, China-US Relations Research Center, Tsinghua University)
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