Original author: 0xmin
Original author: 0xmin
Small and medium-sized banks in the United States are thundering one after another!
On March 8, Silvergate Bank, a well-known cryptocurrency-friendly bank, announced its liquidation, returning all deposits to customers.
On March 10, Silicon Valley Bank, which specializes in providing financial services to Silicon Valley technology companies, sold US$21 billion of marketable securities and suffered a loss of US$1.8 billion. It was suspected of liquidity problems, and its stock price plummeted more than 60% on Thursday. %, the market value evaporated 9.4 billion US dollars in one day.
This also frightened a lot of Silicon Valley bigwigs.
"Silicon Valley Godfather" Peter Thiel's venture capital fund Founders Fund directly recommends that invested companies withdraw their capital from Silicon Valley Bank. Y Combinator CEO Garry Tan also issued a warning, suggesting that invested companies consider limiting their exposure to lenders, preferably not more than 250,000 Dollar……
What's more frightening is that Silicon Valley Bank may be the first domino to cause the crisis, which will not only affect other American banks, but may also hit Silicon Valley technology startups.
What happened?
Today, we will tell a story about how a bank failed.
First, we need to understand the business model of the banking industry.
simply put,simply put,
A commercial bank is a company that deals in currency. The business model of a bank is essentially the same as other businesses—buy low and sell high, but the commodity becomes money.
Banks get money from depositors or the capital market, and then lend it to borrowers, profiting from the interest rate difference.For example: A bank borrows money from deposits at an annual interest rate of 2%, and then lends it to borrowers at an annual interest rate of 6%, and the bank earns a 4% interest margin, which is the net interest income. In addition, banks can also earn profits from basic fee-based business and other services, which is non-interest income.
Together, net interest income and noninterest income make up the bank's net income.
Therefore, if the bank wants to obtain more profits, it is the same as selling goods. The best state is to have no inventory, that is, to lend out all the deposits absorbed at low cost at high prices. After all, deposits have costs and need to be paid to depositors. .
This also forms the two ends of the bank's balance sheet.Owner's Equity + Liabilities:
The owner's equity is the share capital, and the customer's deposit in the bank is essentially borrowed by the bank from the customer, which is a liability. For banks, liabilities mean that the more deposits, the better, and the lower the cost, the better. Crypto-friendly banks like Silvergate attract deposits from major companies in the crypto world mainly by offering a unique service such as the SEN network.assets:
Corresponding to deposits, the loans issued by banks to customers are the bank's claims and belong to assets, including various mortgage loans, credit loans for ordinary consumers, and various bonds, such as treasury bonds, municipal bonds, mortgage-backed securities (MBS) or Highly rated corporate bonds.
So, how did a bank with such a simple business model go "bankrupt"?When a bank encounters a crisis, it means that there is a problem with the balance sheet. There are usually two situations:
Bad Debt; Maturity Mismatch.Bank Bad Debt:
Under normal circumstances, banks need to call back loans to generate profits. If the loans issued or bonds purchased are a pile of junk and default one after another, the banks will face actual losses. Lehman Brothers, which went bankrupt during the subprime mortgage crisis, held a large number of non-performing loans, and the asset loss on the balance sheet was far greater than the bank's equity, that is, it was insolvent.Term Mismatch:
The mismatch between the maturity of the asset side and the maturity of the liability side is mainly manifested in "short-term deposits and long-term loans", that is, the short-term source of funds and the long-term use of funds.
For example, you have to pay rent on the 1st of this month, but your only cash flow income is the salary paid on the 10th of this month. If your cash inflow and outflow do not match, there will be a term mismatch, which is liquidity crisis. What should we do at this time? Either, you sell your assets, such as stocks, funds, cryptocurrencies, etc., and exchange them for cash, or you can borrow some money from friends to cope with the current crisis.return to
For Silvergate and Silicon Valley Bank, maturity mismatches are what got them into trouble.Not only these two banks, but also all kinds of encrypted unicorns who have been in crisis before,
Celsius, Biyin, AEX, etc. all went bankrupt due to the liquidity crisis caused by the maturity mismatch.
In the final analysis, this is all related to the Fed's interest rate hike, and they are all corpses under the dollar cycle.
How did Silvergate go bankrupt?
Founded in 1986, Silvergate Capital Corp (stock code: SI) is a community retail bank located in California, USA. It has remained silent for decades until Alan Lane decided to enter the encryption industry in 2013.Silvergate Bank's main label is that it is a bank that is very friendly to cryptocurrencies. It not only accepts deposits from encrypted trading platforms and traders, but also establishes its own encrypted settlement payment network SEN (Silvergate Exchange Network) for cryptocurrency settlement to help exchanges Better deposit and withdrawal with customers, and become an important bridge connecting legal currency and cryptocurrency, such as
FTX has been using SEN for legal currency deposits and withdrawals.
As of December 2022, Silvergate has a total of 1,620 customers, including 104 exchanges.When the crypto bull market comes, a lot of money comes in, and customer deposits from the crypto industry increase sharply, especially
Due to the existence of SEN, a large number of exchange funds have to be deposited in Silvergate.
Deciphering Silvergate and the Silicon Valley Bank crisis: a gamble under the dollar rate hike cycle
The cryptocurrency-friendly and crypto bull market have led to a sharp expansion of Silvergate's liabilities, that is, deposits, but this has forced the company to "buy assets", and the loan issuance cycle is too long, and this is not Silvergate's advantage, so he chose to invest in 2021 Billions of dollars of long-term municipal bonds and mortgage-backed securities (MBS) were purchased during the year.As of September 30, 2022, the company's balance sheet showed about $11.4 billion in bonds, and in addition, only about $1.4 billion in loans. so,
Silvergate is essentially an "investment company" that arbitrages between the encrypted world and the traditional financial market: it relies on bank licenses and SENs to absorb deposits from encrypted institutions at low or even zero interest rates, and then buy bonds to earn intermediate spread income.
Cheap deposits and high-quality assets coexist, and everything looks good until 2022, when two black swans come.
In 2022, the Federal Reserve enters a crazy rate hike mode, and interest rates rise rapidly, causing bond prices to fall.
Financial products have an identity, today's price * interest rate = future cash flow, the characteristic of bonds is that the amount of repayment of principal and interest has been set at maturity, and future cash flow will not change, so the higher the interest rate, the higher the interest rate today. The lower the price.
Deciphering Silvergate and the Silicon Valley Bank crisis: a gamble under the dollar rate hike cycleIn addition, during the crypto bull market, the wealthy Silvergate acquired FaceBook's unfinished stablecoin project Diem in early 2022, with a total of nearly 200 million US dollars in stock and cash. Come January 2023, Silvergate disclosed that it took a $196 million impairment charge in the fourth quarter of 2022, subtracting the value of the intellectual property and technology it acquired from Diem Group early last year, equivalent to
The previous $200 million was all in vain.In short,Silvergate bought too many high-priced assets at the apex of the bubble,But in this case, as long as there is no problem with the balance sheet, it can also land safely, but at this time,
Silvergate's super client, FTX, is in a storm.
In November 2022, FTX declared bankruptcy, and in a panic, Silvergate depositors began to withdraw money frantically.
In the fourth quarter of 2022, deposits at Silvergate fell by 68%, and withdrawals exceeded $8 billion. This situation is what we often call a bank run.
The liquidity crisis came, and in response to the redemption of depositors, Silvergate had no choice but to either borrow money or sell assets.
First of all, Silvergate was forced to sell previously purchased high-priced securities in the fourth quarter of 2022 and January this year to obtain liquidity, resulting in a securities loss of approximately US$900 million, which is equivalent to 70% of its equity capital.
In addition, Silvergate obtained some of the cash by borrowing $4.3 billion from the Federal Home Loan Bank of San Francisco, a government-chartered agency that makes short-term guaranteed loans to cash-hungry banks.
Everyone knows what happened later. On March 9, Silvergate Bank could not insist on declaring liquidation, saying that it would gradually end operations in an orderly manner and voluntarily liquidate in accordance with applicable regulatory procedures, and that all deposits would be fully repaid.
Silicon Valley Bank Crisis
If you understand the Silvergate Bank crisis, the Silicon Valley Bank (SVB) liquidity crisis is pretty much the same, only SVB is bigger and more influential.Silicon Valley Bank has been one of the most popular financial institutions among Silicon Valley tech and life science startups,
Once the Silicon Valley Bank storms, it will inevitably affect all kinds of start-ups, bringing a double crisis of technology and finance.The fuse of the incident was that SVB sold 21 billion US dollars of bonds in a "jumping sale", resulting in an actual loss of 1.8 billion US dollars.
So SVB said it would raise $2.3 billion through the sale of shares to cover losses related to the bond sale.
All of a sudden, various Silicon Valley venture capital institutions were frightened.
"Silicon Valley Godfather" Peter Thiel's venture capital fund Founders Fund directly recommends that companies invest in divest from Silicon Valley Bank; Union Square Ventures tells portfolio companies to "keep only the minimum funds in SVB cash accounts";
Y Combinator CEO Garry Tan warned its invested startups that the solvency risk of Silicon Valley Bank is real, and suggested that they should consider limiting their exposure to lenders, preferably not more than $250,000;
Tribe Capital advises numerous portfolio companies to withdraw some, if not all, of the cash from Silicon Valley Bank.then,
The bank run came, and Silicon Valley Bank fell into a deeper liquidity crisis.
Let's analyze its assets and liabilities.liability side,
Previously, due to the low interest rate in the entire money market, SVB relied on the deposit rate of 0.25% to attract a large number of deposits. Coupled with the good technology venture capital and IPO markets in the past few years, SVB’s balance sheet has also grown rapidly, from 617.6 in 2019 billion to $189.2 billion by the end of 2021.
However, the technology venture capital market has become sluggish, especially the IPO market has been very deserted in the past year, SVB's deposits have continued to decline, and for savers, direct purchase of U.S. bonds is a more cost-effective option.asset side,
Like Silvergate Bank, SVB also chooses to buy MBS and other bonds when it has a large amount of deposits and cannot release funds through traditional loans.
When interest rates were low, America's big banks kept more of their deposits in government debt, accepting lower yields during times of economic uncertainty. Silicon Valley Bank thought that the interest rate would go down for a long time, and invested most of its deposits in MBS for higher yields.
At the end of 2022, SVB had $120 billion in investment securities, including a $91 billion portfolio of mortgage-backed securities, well in excess of $74 billion in total loans.
According to SVB's public information, the company's $21 billion bond portfolio has a yield of 1.79% and a duration of 3.6 years. For comparison, on March 10, the 3-year US Treasury yield was 4.4%.
Falling bond prices will create losses for Silicon Valley Bank as interest rates soar.
Silicon Valley Bank holds a $91 billion bond portfolio held to maturity that is worth just $76 billion today, representing an unrealized loss of $15 billion.
SVB chief executive Greg Becker said in an interview with the media: We expected interest rates to rise, but we didn't expect it to be as much as it is now.
