Source: Snowball

On March 10, a statement issued by the Federal Deposit Insurance Corporation of the United States brought Silicon Valley Bank to bankruptcy at light speed. This became the largest collapse event in the U.S. financial industry since 2008.

Some people call the Silicon Valley Bank incident a "mass extinction-level event for startups." Others say it is the first time in their lives that they have personally experienced a well-known bank going from thunderstorms to runs to bankruptcy in 12 hours.

Nearly half of the venture capital-backed technology and life sciences start-ups in the United States have established financing relationships with Silicon Valley Bank. So why did Silicon Valley Bank become an overnight success? How will it be performed in the future? The incident is still progressing. This article summarizes the market progress and comprehensive media reports within 48 hours. ‍‍‍‍‍‍‍

01Bankruptcy in 48 hours! Unable to pay wages, layoffs or current

Silicon Valley Bank is the home of many startups and VCs. Its lightning-fast bankruptcy has also left many venture capital firms and technology companies in the heart of Silicon Valley experiencing the darkest moment in history. It is understood that more than 1,000 YC companies have all their payrolls in Silicon Valley Bank, not to mention a large number of VC funds and listed technology companies.

Cailian Press reported that Chen Jiaxing, president of the well-known startup incubator Y Combinator, called the Silicon Valley Bank incident a "mass extinction-level event for startups" in an interview with the media. Chen Jiaxing emphasized that if these companies have to wait weeks or even months to get the money, it will destroy an entire generation of startups in the United States.

According to China Business News, Andy (pseudonym), an entrepreneur of a Chinese medical startup company, said, "We have been trying to transfer the money out since yesterday (March 10), but the bank collapsed before we could do so. Everything happened too fast." Currently, the status of the bank's website shows that it is under maintenance.

Some people also said in their circle of friends that it was the first time in their lives that they personally experienced a well-known bank going from collapse to bank run to bankruptcy within 12 hours, and the asset transfer was completed very quickly. When they woke up, Silicon Valley Bank had gone bankrupt.

This series of events will also trigger a break in the capital chain, which may lead to salary inability and layoffs in Silicon Valley technology companies.

Greg Martin, founding partner of investment firm Liquid Stock, said: More than 50% of technology companies keep most of their cash in Silicon Valley banks. The worst case scenario is that thousands of Silicon Valley "workers" will not get paid next week. Since it is illegal to hire employees without paying them, a large-scale layoff wave is inevitable.

The panic caused by the collapse of Silicon Valley Bank is also spreading in Silicon Valley, and a large number of employees of Silicon Valley technology companies have complained that this will be the "darkest day" in Silicon Valley.

02 Will Silicon Valley Bank be the “second Lehman”?

Why did Silicon Valley Bank collapse? Simply put, this was a liquidity crisis caused by rising interest rates. In order to meet customers' demand for withdrawals, Silicon Valley Bank chose to sell assets at a discount, but this behavior also caused the market to question the bank's solvency, which eventually intensified the run and triggered market fluctuations.

The Federal Reserve once implemented an accommodative policy, allowing funds from many technology startups to flow into commercial banks such as Silicon Valley Bank that focus on serving startups. As deposits surged, Silicon Valley Bank purchased a large amount of U.S. Treasury bonds and mortgage-backed bonds.

After the U.S. entered an interest rate hike cycle, the prices of assets held by Silicon Valley Bank dropped significantly. At the same time, due to changes in the financing environment, startups began to continue to consume deposits. Silicon Valley Bank was forced to sell assets, resulting in losses and ultimately triggering market sentiment. Sentiment spreads across the financial system.

At the same time, Silicon Valley Bank is also different from general commercial banks in terms of business model. It will issue loans in exchange for customers' equity or options. For particularly promising customers, it will also participate in investment through the bank's VC department to obtain capital appreciation, etc.

Active guidance and long-term service - We work with the most innovative founders, CEOs and investors to help them survive and thrive in the ever-changing innovation economy. We support companies at all stages of growth and serve investors at all stages, tracks and regions.

The above corporate vision reflects the unique value of Silicon Valley Bank, and it is basically the only large commercial bank in the world with such a positioning.

Will the collapse of Silicon Valley Bank this time trigger a systemic crisis like in 2008?

First of all, Silicon Valley Bank’s business model is somewhat special. Its customer base is mainly science and technology companies, which are overly sensitive to liquidity and technology cycles.

According to Inc. China, Xu Min, a professor of finance at Zhejiang University of Finance and Economics, believes that Silicon Valley Bank is different from Lehman Brothers and there are huge differences between the two.

"Lehman Brothers is an investment bank, while Silicon Valley Bank is a commercial bank. Moreover, before the 2008 financial crisis, Lehman Brothers was the fourth largest investment bank in the United States. Through asset securitization, its leverage ratio was very high. In addition, its products were sold in large quantities to other financial institutions around the world. Therefore, its collapse triggered a chain reaction, and the depth and breadth of the impact were incomparable to the collapse of Silicon Valley Bank." Xu Min said.

As a commercial bank, Silicon Valley Bank's business is mainly inventory and bond investment. Xu Min said that the characteristics of American banks are different from those of domestic banks. Initially, they were not allowed to set up branches across states. This resulted in a large number of banks in the United States, with more than 7,000 banks to date. Most commercial banks are relatively small in size. It was not until the 1980s that the corresponding law was passed that allowed the establishment of branches across states. Even large banks such as JP Morgan and Bank of America only have branches in more than a dozen states in the United States, and they rely more on their large overseas business.

Of course, when Silicon Valley Bank lends money to high-tech startups, it also uses its own capital to buy a small portion of the equity (or stock options) of these companies, and to a certain extent plays the role of an investment bank.

Of course, Xu Min believes that the biggest risk brought about by the bankruptcy of Silicon Valley Bank lies in the panic effect caused by this incident. "Panic emotions are contagious. If panic emotions spread and more banks go bankrupt, the risks will be difficult to estimate."

At the same time, two days after the Silicon Valley crisis, the FDIC took over, which to a certain extent curbed the panic.

03 Pressure on the Federal Reserve

Silicon Valley Bank's business is concentrated in the fields of technology and venture capital, and it is less dependent on individual depositors' deposits than traditional banks. The Federal Reserve's aggressive interest rate hikes have led to a drop in bond prices, a rapid loss of commercial bank deposits, and increased financing costs. Against this backdrop, Silicon Valley Bank was not prepared, leading to its current predicament.

But Silicon Valley Bank is not alone in facing this dilemma.

Therefore, the lightning-fast collapse of Silicon Valley Bank has also triggered market thinking about the next interest rate hike by the Federal Reserve.

On March 11, Xinhua News Agency reported that analysts said that the closure of Silicon Valley Bank highlights the negative impact of the aggressive interest rate hikes by the US Federal Reserve. The Fed's aggressive interest rate hikes have led to a drop in bond prices, a rapid loss of commercial bank deposits, and increased financing costs. Against this backdrop, Silicon Valley Bank was not prepared, leading to its current predicament.

Before Friday's event, the market was still swinging between a 25 and 50 basis point rate hike, which means that after a strong 450 basis point rate hike in the past year, there is at least 50 or 75 basis points of room for further increases.

Nick Timiraos, a reporter for the Wall Street Journal known as the "New Federal Reserve News Agency," pointed out in his latest article that the turmoil caused by the collapse of Silicon Valley Bank has largely dispelled market expectations for a 50 basis point interest rate hike.

The Industrial Bank macroeconomic team believes that as signals of economic fragility such as the rise in unemployment rate gradually emerge, and the profit shock faced by enterprises represented by technology companies is gradually emerging, coupled with the Silicon Valley Bank liquidity incident, the possibility of the Federal Reserve returning to a 50bp rate hike is low, because in essence, the lag effect of monetary policy on cooling the demand side is the core logic of the Fed's slowdown in rate hikes in February; however, the stickiness of core service inflation has not yet been resolved, especially the employment growth and hourly wages in the low-end service industry have shown resilience that may last longer than expected, continuing to support "stay higher for longer."