'Stagnation and Tightening' Liquidity Amid Collapse of US Mid-sized Banks
Bank Runs + Asset Losses Behind Bankruptcies
#. Max Jo, co-founder of the US startup 'Coverage Cat,' boarded a bus on the 9th (local time) to attend a founders' event in Montana. Once seated, he witnessed all the fellow founders around him furiously tapping on their smartphone screens. They were all trying to withdraw their company funds deposited in Silicon Valley Bank (SVB). He recalled, "A bank run was actually happening." Following his colleagues, he logged into the SVB banking app and attempted to transfer most of the company's balance to another account.
In the context of ongoing economic recession and high-intensity tightening, SVB's bankruptcy on the 10th occurred at lightning speed just 36 hours after liquidity issues surfaced. SVB, with total assets of $209 billion (approximately 277 trillion KRW), fell into a liquidity crisis due to a combination of massive deposit withdrawals (bank run) and large-scale bond investment losses, leading to a swift bankruptcy decision. The day before the bankruptcy, SVB announced that it had incurred losses of $1.8 billion (about 2.36 trillion KRW) from bond sales due to a recent decline in deposits, which triggered the bank run.
The New York Times (NYT) pointed out that SVB's extreme online depositors were the trigger for this incident. The NYT reported, "SVB's depositors are not ordinary people but startups or startup investors who communicate online all day," adding, "As the crisis theory about the bank's solvency rapidly spread through social media such as Twitter and Slack channels in a single day, frightened customers quickly opened their smartphone banking apps and began withdrawing deposits, leading to the bankruptcy."
According to the WSJ, SVB depositors attempted to withdraw $42 billion (about 55.6 trillion KRW) by the time financial institutions closed on the same day. Then, on the morning of the 10th, the California Department of Financial Protection and Innovation closed SVB due to insufficient liquidity and insolvency and appointed the Federal Deposit Insurance Corporation (FDIC) as the bankruptcy receiver.
SVB's bankruptcy is the second largest among banks that have entered liquidation procedures in US history. There is growing concern that if the deposit outflow starting from SVB spreads to other banks, second and third SVBs could emerge, leading to a chain of bank failures and corporate bankruptcies, thereby expanding the crisis throughout the financial industry.
However, the 2008 global financial crisis triggered by the bankruptcy of the giant financial group Lehman Brothers, one of the four major US investment banks, due to the failure of mortgage-backed securities (CDOs), and the recent SVB incident are fundamentally different, according to views inside and outside the financial sector.
The WSJ pointed out that unlike the 2008 financial crisis, where banks went bankrupt after aggressively investing in risky assets such as derivatives, the recent SVB incident was caused by a divergence between the value of deposits and assets held by financial institutions, which are core capital, due to factors like central bank interest rate hikes, and thus was not as severe as in 2008. The bankruptcy background is attributed not to investments in risky assets like derivatives that drove banks to ruin in the 2008 crisis but to the side effects of high interest rates.
In terms of asset size, the possibility of spreading to a systemic financial crisis is considered low. While Lehman was one of the four major US investment banks, SVB's asset size of 277 trillion KRW is less than 7% compared to JP Morgan, the largest US investment bank, with assets of about $3.21 trillion (approximately 4,212 trillion KRW).
The customer base and investment tendencies also differ significantly from typical bank failures. SVB's customer base is specialized in US startups, and it tends to focus investments mainly on long-term bonds such as US Treasury securities, making the possibility of a chain bankruptcy due to held securities low.
The US government has responded swiftly after the SVB incident by quickly closing the bank, transferring all held deposits, and promoting asset sales. On the day, the US Treasury Department, Federal Reserve (Fed), and Federal Deposit Insurance Corporation (FDIC) issued a joint statement announcing that Treasury Secretary Janet Yellen reported to President Joe Biden on the recommendations of the Fed and FDIC and received approval for a resolution that fully protects all depositors.
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