How SVB Is Different Than Lehman — And Not Different Enough
The fall of Silicon Valley Bank revives memories of Lehman Brothers' bankruptcy. The two situations have some fundamental differences, but there is enough in common that the risks that SVB could spark a new global financial crisis is very real.
PARIS — In finance, brands can be the omens of disaster. On Monday, April 2, 2007, New Century Financial collapsed. The fall of this "financial institution of the new century," which had failed to properly assess risks, was the true starting point of the great financial crisis that culminated 18 months later with the bankruptcy of Lehman Brothers.
On Friday, March 10, 2023, Silicon Valley Bank (SVB) was shut down by U.S. authorities following the largest bank run in history. Its clients wanted to withdraw $42 billion in a single day.
The closure of the Silicon Valley bank was a result of disastrous management, but also from its central role in a start-up ecosystem that's been weakened by a scarcity of money.
The key question is: Is this closure the starting point of a new crisis?
So far, financial authorities have decided to take strong measures to mitigate the panic. On Sunday, the Federal Reserve announced a plan that "fully protects all depositors." This is essential for SVB's client firms, 97% of which have assets exceeding $250,000 protected by the Federal Deposit Insurance Corporation created during the 1930s crisis. They will be able to pay their employees this week.
Still, the ghost of the Lehman Brothers collapse continues to haunt the financial markets, even if SVB is in many ways the opposite of Lehman. It is a local commercial bank, while Lehman was an international investment bank. Its headquarters in Santa Clara is a modest two-story concrete building, while Lehman occupied a 38-story skyscraper in Manhattan.
The safest investments
The problems of the two banks, as well as their repercussions, are also very different. Lehman went bankrupt because it had lent too much money to risky mortgage players. The shock was immense because it was connected to other major banks through a myriad of financial transactions. Thus the "systemic" risk. In the eyes of accountants, it was class 1 and class 2 of the bank's assets that were at issue.
When SVB sold $21 billion in securities, it recorded a loss of $1.8 billion.
SVB, on the other hand, did something more original. Its loss had two causes. It invested money not in assets that were too risky, but in investments considered among the safest in the world — US Treasury bonds and mortgage-backed securities, which can be resold at any time. However, these securities have a flaw: when interest rates rise, their value decreases (until their yield equals the new market rate).
However, the Fed has sharply raised its short-term interest rate over the past year, and other rates have also risen significantly — ten-year rates, for example, have doubled approaching 4%. When SVB sold $21 billion in securities, it recorded a loss of $1.8 billion.
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Three indirect risks
And SVB had to sell these securities because its clients wanted their money back, long before the bank run on March 9. With tighter monetary conditions, start-ups are raising less money. And they prefer to invest their liquidity in money market funds where yields are becoming appreciable, rather than letting them sleep at SVB. It was these withdrawals that forced the bank to sell part of its securities and record the losses. Accountants would say that class 3 of the asset and class 2 of the liability are at issue.
The halt of SVB's flows is unlikely to cause a crash of large partner banks. The "systemic" risk is therefore not direct, unlike Lehman Brothers. But there are three indirect risks.
The first is that customers of small banks become worried and switch their accounts to larger, better-supervised institutions with thicker liquidity cushions to protect them.
To prevent these massive transfers, U.S. authorities have decided to protect SVB depositors (as well as those of Signature Bank, a New York-based bank very active in cryptocurrencies, which closed on Sunday, March 12).
The second risk is an invisible chain reaction. The SVB story recalls accidents that have marked the road, from the downfall of New Century Financial to the Lehman Brothers apocalypse. In July 2007, two local banks, like SVB, had to be bailed out after losing a lot of money on financial products built on US real estate, the German banks IKB and SachsenLB.
In September 2007, the British bank Northern Rock experienced a "bank run" that knocked it down. In March 2008, investment bank Bear Stearns was taken over in a panic by JP Morgan, while SVB sought a savior (in vain).
They could have difficulty saving indefensible financiers.
Finally, the authorities could have difficulty saving indefensible financiers. Gregory Becker, the head of SVB, sold $3 million worth of bank shares in February. He had recruited the former CFO of a Lehman Brothers branch.
He successfully fought for Congress to raise the level of assets under management at which supervisory authorities closely monitor a bank's accounts, thus avoiding close surveillance of SVB.
Nassim Nicholas Taleb, the theorist of "black swans" that shake finance, quipped on Twitter: "They are all libertarians until they are hit by higher interest rates."
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