The collapse of three US banks in less than a week has sent shockwaves through the financial industry, with global stocks plunging and public confidence shaken.
The aftermath of their closures could linger in the weeks ahead, creating an obstacle for the Federal Reserve in its fight to tame inflation.
BANK RUN
Last Wednesday, the tech industry panicked when Silicon Valley Bank (SVB) revealed huge losses, prompting a rush by startups to pull out their money from the 40-year-old institution. Based in Santa Clara, California, SVB provided banking services to nearly half of the US venture capital-backed technology and life-science companies, as well as more than 2,500 venture capital firms, the company's website said.
SVB sold a US$21 billion bond portfolio, consisting mostly of US Treasuries. The portfolio was yielding an average of 1.79%, far below the current 10-year Treasury yield of roughly 3.9%. This forced SVB to recognise a $1.8 billion loss, which it needed to fill by raising capital.
On Thursday, the bank said it would sell $2.25 billion in common equity and preferred convertible stocks to fill its funding hole. Its shares ended trade that day down 60% as investors fretted that deposit withdrawals might push it to raise even more capital.
Some SVB clients pulled their money from the bank on the advice of venture capital firms. This spooked the investors SVB lined up for the stock sale, and the effort to raise capital collapsed later that day.
Adding to the turmoil was Silvergate Bank announcing its shuttering, the end for the original and most important financial institution serving the crypto industry.
The closure was reported on Wednesday, with Silvergate blaming "recent industry and regulatory developments" that caused an exodus of major corporate clients such as Coinbase, Gemini, Paxos and Circle.
"An orderly wind-down of bank operations and a voluntary liquidation of the bank is the best path forward. This includes repayment of all deposits," the California-based corporation said in a statement.
EVERYWHERE ALL AT ONCE
As SVB looked for ways to accommodate its customers' withdrawals and alternative funding, including through a sale of the company, the Federal Deposit Insurance Corporation (FDIC) on Friday announced that SVB was shut down and placed under its receivership. The agency seeks to sell the bank's assets and future dividend payments may be made to uninsured depositors.
The bank's failure, the largest since the 2008 financial crisis, raised concerns about other institutions. US authorities including the Fed, the Treasury Department and the FDIC jointly announced Sunday night Signature Bank in New York collapsed over the weekend.
Authorities have been rushing to contain the fallout. On Sunday, Treasury Secretary Janet Yellen said regulators were working over the weekend to stabilise SVB and tried to assure the public that the broader US banking system was "safe and well capitalised".
Ms Yellen acknowledged that many small businesses were counting on funds tied up at the bank. She suggested a possible solution could be an acquisition of SVB, emphasising that regulators were trying to address the situation "in a timely way".
According to a person familiar with the matter, the FDIC on Saturday started an auction for SVB that was set to wrap up Sunday afternoon. If the push to find a buyer fails, the government would consider safeguarding uninsured deposits at the bank, according to another source familiar with the process. No decision has been made yet, said the source.
Customers with deposits of up to $250,000, the maximum covered by FDIC insurance, will be made whole, according to regulators.
For depositors with amounts larger than $250,000 in their accounts, there is no guarantee they will get all of their money back. Another idea being circulated involves the FDIC figuring out a way to pay back all the depositors, said the source.
Typically the FDIC is required to unravel failed banks in the least expensive way possible, which often entails leaving the private sector to shoulder any losses on uninsured deposits. But the agency could get around that requirement by invoking a "systemic risk exception", which would allow the government to pay back uninsured depositors if not doing so would have "dire consequences for the economy or financial stability".
Invoking the exception is not simple as it requires the treasury secretary, in consultation with the president, the FDIC and the Fed to sign off on the decision.
CAUSES OF THE COLLAPSE
The shutdown and takeover of SVB can be traced to the Fed raising interest rates, souring the risk appetite of investors. The US central bank has been raising interest rates from record-low levels since last year in its bid to fight inflation.
Consequently, investors have less risk appetite when the money available to them becomes expensive because of higher rates. This weighed on technology startups, which are SVB's primary clients, because it made their investors more risk-averse.
As higher interest rates caused the market for initial public offerings to shrink for many startups and made private fundraising more costly, some SVB clients started pulling money out to meet their liquidity needs. This culminated in the bank's struggle last week to meet its customers' withdrawals.
The bank was also unique in ways that contributed to its woes. The FDIC only insures amounts up to $250,000, meaning anything more than that does not have government protection. SVB had a significant number of large, uninsured depositors who tended to withdraw their money during signs of turbulence.
SVB did what most of its rivals do. Flush with cash from startups, the bank kept a small chunk of its deposits in cash, and it used the rest to buy long-term debt such as Treasury bonds. Those investments promised steady, modest returns when interest rates remained low.
It turned out the investments were shortsighted as SVB did not consider what was happening in the broader economy, which was overheated after more than a year of pandemic stimulus.
Startup funding was also starting to dwindle, leading SVB's clients -- a mixture of technology startups and their executives -- to begin withdrawing their money. To fulfil its customers' requests, the bank had to sell some of its investments at a steep discount.
LIMITED EXPOSURE
Amid growing concerns the US banking industry jitters could lead to global turbulence as seen in past economic crises, Thai authorities and regulators rushed to calm the public's nerves, ensuring them about the strength of Thai banks.
According to Stock Exchange of Thailand president Pakorn Peetathawatchai, the collapse of SVB and Signature Bank did affect global liquidity. However, the size of both banks is not large so the impact on the US GDP would be minimal, he said.
"Unlike conventional banks, both SVB and Signature Bank are unique as their customers are mostly in tech, startup and venture capital segments. The two banks also have little connection to Thailand," said Mr Pakorn.
"Thai banks are fundamentally strong with high levels of capital. They are well-diversified in various businesses, not limited to reliance on the tech and startup sectors."
Suwannee Jatsadasak, assistant governor at the Bank of Thailand, assessed the SVB collapse as having a limited impact on Thailand's financial stability because local commercial banks have no direct exposure to the troubled US banks.
In addition, the total exposure of local banks in startups and fintech firms globally represents a marginal level of less than 1% of Thai banks' capital.
No local banks are directly investing in digital assets, while their subsidiaries investment in digital assets is worth roughly 200 million baht, she said.
The central bank strictly supervises their investment in digital assets and venture capital, stipulating a ceiling rate for investment and requiring strong capital reserve conditions for such investment.
The Finance Ministry believes the SVB fallout will have a short-term effect on the US tech sector, but not on other sectors.
According to the ministry's preliminary evaluation, the collapse of SVB will not have a direct impact on Thailand, according to Fiscal Policy Office director-general Pornchai Thiraveja, however the ministry and related agencies will continue to monitor the situation and are ready to take action to protect the country's financial stability.
Many economists around the world predict it won't take long for stability to return to the banking system, though some analysts expect the Fed might be forced to ease up on its interest rate hikes to slow inflation. Doing so could spell more damage for global stock markets, said the analysts.
If the Fed halts or slows rate hikes, that could potentially create more instability for markets, said analysts. As authorities need to monitor how quickly concerns about the stability of the banking sector subside, the market's fears about a potential US recession could grow.
