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An Insolvency Iceberg?

The sudden collapse of Silicon Valley Bank was met by an equally swift response from US regulators. But the crisis is far from over, and the nature of the authorities’ response introduces problems of its own.

TOKYO – The sudden collapse of Silicon Valley Bank on March 10 was met by an equally swift response from US regulators, who announced plans to make whole all depositors, including the uninsured. But the SVB failure was immediately followed by the collapse of New York’s Signature Bank on March 12, and then by Credit Suisse’s troubles a week later. The latter, once one of the world’s biggest investment banks, is now being taken over by UBS at a massive discount.

Assuming the media’s reporting tells the whole story, these sudden failures have a straightforward cause. SVB took in many large deposits (above the $250,000 threshold insured by the Federal Deposit Insurance Corporation) from tech startups and then used those funds to buy long-term bonds. But after the US Federal Reserve started raising interest rates at a rapid clip last March, these bonds’ mark-to-market value declined, and the unrealized losses on SVB’s balance sheet rose.

Although SVB had declared that its bonds would be held to maturity, it had to sell some of them at a loss to free up liquidity. When those losses were announced, depositors – egged on by warnings circulating on social media – feared the worst and rushed to withdraw their deposits, triggering a classic bank run. Once the run was underway, additional bond “fire sales” to free up liquidity became inevitable, and SVB’s liquidity crisis became an insolvency crisis.