The Godfather of Innovation Is Gone

About SVB

 Companies such as Amazon, one of the famous big tech companies in the U.S., Airbnb, and Uber, which would have used at least once during their trips, might not have been able to grow as much as they are now without this bank. This bank is Silicon Valley Bank, the godfather of Silicon Valley startups. Silicon Valley Bank (SVB) was founded on October 17, 1983 and is a bank based in Santa Clara, California, United States. Founded in 1983 by Bill Biggerstaff and Robert Medearis, former Bank of America executives. After moving its headquarters from San Jose to Santa Clara in 1995, it opened branches in various parts of the United States. We also opened overseas branches and expanded our business significantly. It was the largest commercial bank in Silicon Valley, with wealthy venture capitalists and startup companies as its main customers. They were also selling various services specialized in venture companies and startups. Unusually, it also held a large share among U.S. wine farms, asfew banks offered loans to wine farms, in addition to being located in California, the main operator of Silicon Valley. In 2008, it received funding from the U.S. Treasury through a badasset program, but it continued to expand afterwards and announced a joint venture with China's Shanghai-Pudong Development Bank in 2012. In 2016, it once became the largest U.S.bank by market share, with a market share of 25.9%. 16th largest bank in the United States as of December 2022.

 

 SVB is considered an indispensable bank in the startup ecosystem. In addition to deposit and loan services, it provides investment banks, venture capital, private equity funds, and private cranking services to startups. In particular, it has 44% of US tech and healthcare venture companies as customers and has participated in attracting $230 billion worth of investment since 2009. Cisco, Airbnb, Uber, LinkedIn, and many more serve as primers for startup growth. We are also investing in Korean startups that have entered the local market.

 

Background and progress of SVB's bankruptcy

 In order to understand the bankruptcy case of Silicon Valley Bank (SVB), it is necessary to first pay attention to the fact that SVB is a very special structure called a bank of startups.

 -Start-ups basically receive investor money and even lose 3rd and 4th funding at the time of establishment. And the investment power of the U.S. capital market is great. In other words, these startups were holding a lot of cash, and SVB, where the startup is the main customer, accumulated the cash as it is. But there is a big difference between start-up companies and ordinary companies, so they don't invest in infrastructure. If you are not a very large company in the first place, you will not have to borrow money from the bank separately for the time being if you have succeeded in funding. Even if you have invested in debt, you may have a clear cash cow from the beginning, which is a clear source of funds due to the nature of the startup. In other words, it is also characterized by the fact that these startups do not actually earn much until they are on a stable track.

 

 These characteristics are negative for SVB, that is, for banks. Banks have to lend money and receive interest, which is possible for traditional types of companies. If the bank borrows money and makes bold advance investments, and the company's profits increase, this is a virtuous cycle that leads to the bank's interest income. But SVB's main customer portfolio is all cash-rich startups, so paradoxically, as startups' returns rise, SVB only accumulates cash, and there was no place to lend this cash. In fact, it would have been different if we had succeeded in diversifying our portfolio here and lent money to other businesses. SVB's experts naturally try to diversify their portfolios. It is natural that the accumulated cash should be rolled somehow to lead to the bank's profits. But one of SVB's biggest investments is U.S. government bonds, which is also long-term debt. It may not have been a bad judgment under the assumption that low interest rates continue. Holding a large number of U.S. government bonds, classified as ultra-high-quality safe assets, would have allowed them to continue to earn profits stably, although their income was not large. However, as will be described later, it is rare for banks to take a large proportion of their assets into long-term bonds, which is a key factor in SVB bankruptcy. Then U.S. inflation and the resulting rate hike came as a nightmare for SVB. If the benchmark interest rate rises, the U.S. government bond rate will also rise. Party timefor creditors (typical investors or banks). This is because an increase in interest rates means that their interest income will also increase.

 

 There is a problem of falling government bond prices, but if you classify them as holding them until maturity, no accounting losses are recognized. Then, it would be a tragedy if too many long-term U.S. government bonds were bought at a time when interest rates were low, such as SVB. In this state, interest rates rose, and these long-term bonds became literally bargain prices. For example, suppose you buy 1 million won worth of 10-year government bonds with an annual rate of 2%, and the interest rate on the government bonds becomes 5% the next day. Regardless of whether interest rates rise or not, holding this government bond for 10 years is beneficial because a totalof 1.2 million won, including the principal, can be returned. The problem arises when you urgently need funds and need to sell this. In the market, you can buy 10-year government bonds that will be 1.5 million won in 10 years for 1 million won, but no one will buy government bonds that will be 1.2 million won in 10 years for 1 million won. If you have to sell it, you have to buy 2% government bonds instead of 5%, cut 150-120 = 300,000 won, and sell them for about 700,000 won. In other words, if you can hold it in the long run, it is profitable anyway, but if you have to sell it in a short period of time, you may lose a lot. In this situation, short-term bonds yield high profits every time, but long-term bonds remain low in interest rates, resulting in poor profits.

 

 When there are bonds (long-term bonds) that give 2% in 10 years and bonds (short-term bonds) that give 5% in a year, investors naturally have no choice but to choose the latter. In other words, short-term bonds are popular under current high interest rates, so even if prices fall, the range is relatively small, but the range is even greater because no one wants to buy long-term bonds. And this crash still leads to a decline in the value of SVB's assets. With more than half of the bank's investment portfolio in long-term bonds (typically around 25%), the price of long-term bonds has fallen to the bottom. However, as written above, SVB is a bank with a significantly low income and traditional loan interest. As a result, all cash is tied to long-term bonds, the value of long-term bonds has fallen, and there is no other hole to make profits. In addition, the COVID-19 incident made SVB's situation worse. Precisely, the pandemic has boosted the liquidity of startups. In special situations caused by COVID, several startups made a lot of money, and all that cash was piled up in SVB. However, as COVID-19 slowly ended, the start-up'sCOVID-19 special game began to end, and the overflowing liquidity gradually returned to its original position. In other words, a liquidity crunch has begun. Against this backdrop, the above-mentioned rise in U.S. Treasury yields has paradoxically come as a bigger negative factor for SVB, unlike other banks.

 

March 8th

 Silicon Valley Bank (SVB), the largest commercial bank in Silicon Valley, said it would sell $21 billion of available-for-sale securities (AFS, bonds and stocks bought with the intention of selling before maturity) even at the risk of $1.8 billion in after-tax losses. SVB has invested most of its excess cash in U.S. government bonds and others, but the U.S. Federal Reserve (Fed) aggressively raised interest rates, and the price of its holdings, government bonds, fell significantly to liquidate its position. "In general, banks are not willing to sell their holdings at a loss," the Wall Street Journal said. "However, when there is concern about a large deposit withdrawal, they make these decisions to secure cash." The prevailing analysis is that the amount of funds held by startups, which are customers, is gradually decreasing.

 

March 9th

 Silicon Valley Bank (SVB) faced a bank run crisis, a massive deposit withdrawal, due to its remarks the previous day. In the aftermath, shares of parent company SVB Financial Group plunged 60.4% in one day, and the market capitalization of the four largest U.S. banks evaporated by more than 68 trillion won. As the Silicon Valley liquidity crisis hit Wall Street following the liquidation of Silvergate Capital in the U.S., a virtual currency bank, the previous day, fears are growing that even a system crisis such as the 2008 global financial crisis couldoccur. In particular, Wall Street is concerned that it could spread to financial system risks amid the U.S. Federal Reserve's signal to speed up its tightening again. Some venture capitalists even urge them to take out the money. UNION SQUARE VENTURES advised to "take it all out, leaving only $250,000 guaranteed in your deposit account." Fintech firm Brex even withdrew billions of dollars in one day. In addition, the spread of business messengers and phone banking such as Slack serves as a momentum for bank runs. As a result, 56 trillion wo was withdrawn in just one day.

 

March 10th

 SVB failed to raise capital originally planned. Because the Bank Run situation was out of control. The California Financial Protection Innovation Administration said it would close SVB, citing insufficient liquidity and insolvency. It also explained that it would appoint the Federal Deposit Insurance Corporation (FDIC) as bankruptcy trustee. In the future, the Federal Deposit Insurance Corporation (FDIC) plans to establish a corporation called "Santa Clara Deposit Insurance National Bank (DINB)" to transfer all deposits held by SVB and push for asset sales. Under the measure, depositors within the $250,000 deposit protection limit can withdraw their deposits after the 13th. In addition, non-insured depositors can receive public bond certificates paid by FDIC for deposits exceeding the insurance limit. For reference, all deposits have been frozen, with deposits alone amounting to $1754 billion and about KRW 232 trillion in Korean currency. SVB bankruptcy is considered the second largest since JPMorgan Chase's Washington Mutual bankruptcy, which collapsed during the 2008 financial crisis. The market shock is bound to be that great.

 

Impact on the United States

 In the U.S., if the crisis spreads, it is predicted that the next bank with a lot of real estatemortgage loans will be in the U.S. Analysts say it will be difficult to respond to the crisis if loans become insolvent in the aftermath of the Federal Reserve's rate hike. More than $600 billion of securities held by the U.S. banking industry recorded unrealized losses as the cause of SVB insolvency, according to the Federal Deposit Insurance Corporation (FDIC). If you hold it until the expiration date, there is no possibility of loss, but if you face a bank run crisis, you have to sell it at the risk of loss. A sense of crisis has grown, especially among small and medium-sized regional banks, due to the risk of bankruptcy in Silicon Valley. PacWest Bancorp, where two-thirds of its loans are linked to real estate, saw its stock plunge 54% over the past two days. In addition, First Republic Bank, which focused on the mortgage business, also saw its stock price plunge 29% during the same period. First Republic Bank L.A. branch has a long line to withdraw deposits, according to the Daily Mail.

 

 As the size of the withdrawal grew, the bank appeased customers in a statement, saying, "We are continuously managing safety and have sufficient liquidity." First Republic Bank has 80 branches in 11 states. The main indicator to note in this situation is Accumulated Other Comprehensive Income (AOCI). AOCI refers to net income that has not yet been realized, used as an indicator of future losses. According to MarketWatch, there are more than 10 banks with AOCI in the red. Among them, Alli Financial was the largest with a deficit of $4.059 billion, with banks with large deficits likely to go bankrupt in the event of a bank run. However, there is also an opinion that system risks will not spread throughout the banking ecosystem. The United States is a country where capitalism is very developed, so small and medium-sized banks are frequently bankrupt in the first place. According to FDIC, 562 banks have gone bankrupt since 2001. SVB ranked second in total assets, with Washington Mutual Bank, which went bankrupt during the 2008 global financial crisis.

 

 The bank's total assets were $307 billion and would later be merged into JPMorgan Chase. In the case of Lehman Brothers, its total assets exceeded $600 billion, but it is not included in the tally because it is an investment bank and has no deposits. U.S. banks closed 25.5 times a year and more than two times a month for 22 years. However, 163 cases occurred during the 2008-2009 financial crisis. Therefore, some foreign media outlets say that even if some small and medium-sized banks go bankrupt, they will not spread to the crisis of the system as in 2008. As SVB focuses on IT and bio startups, not many banks are overly focused on certain areas, and not many banks have invested most of their excess cash in U.S. government bonds.

 

 86% of SVB's frozen deposits are not guaranteed. Because we put a lot of money into it because there are many corporate customers. Streaming platform company Roku was cashed at $478 million and Roblox was cashed at $150 million, respectively. It is customary in the United States to pay twice a month. One startup CEO said, "Some funds are tied up, but not to the point where they can't pay." But another CEO said, "We need to get a loan."

 

Impact on Korea

 As experts cited high interest rates and financing due to tightening as the cause of SVB bankruptcy, they are concerned that not only the U.S. financial market but also Korea will suffer indirect damage. In particular, although it is not at the level of causing a major crisis in the financial market, it is predicted that financial market instability may lead to preference for safe assets, causing problems in liquidity supply. The Financial Supervisory Service said that despite growing uncertainties in the international financial market due to the SVB crisis, soundness indicators such as domestic banks' bad debt ratio and delinquency ratio, BIS capital ratio, provisions, and liquidity coverage ratio (LCR) are generally good. In addition, we willstrengthen the inspection of potential risk factors to prevent instability factors from overseasfrom spreading to system risks in the domestic financial market, such as SVB bankruptcy cases. It said it plans to induce banks to expand their loss-absorbing capacity by introducing special loan reserves and improving standards for accumulating economic buffer capital (CCyB) so that banks can smoothly perform their fund brokerage functions in the event of worsening economic conditions.

 

 Serious damage to the fund management of Korean startups operating in the region. First of all, SVB is a bank specialized in ventures and startups, so psychological contraction of the domestic venture investment market is inevitable right away. The bankruptcy of SVB, which specializes in startups, inevitably leads to a psychological contraction in the venture investment market at a time when domestic venture investment decreased by more than 10% last year due to the three complex crises of high interest rates, high prices, and high exchange rates. Even startups in Korea alone are expected to be affected by startups that are investedby local VCs (venture capital) in the U.S. or startups that are operating in the U.S. because their capital itself has become globalized.

 Eventually, on March 27, SVB's sale of SVB, which lasted about two weeks, ended when a small and medium-sized bank in North Carolina, called First Citizens Bank, agreed to acquire all of SVB's loans, deposits and branches. Specifically, First, Citizens acquired SVB assets worth about $72 billion for $16.5 billion, about a 77% discount. This includes all deposits and loans, and stocks and some assets worth about $90 billion of SVB assets will remain under court receivership and will be managed by the Federal Deposit Insurance Corporation. In addition, about 17 branches of SVB will be renamed and opened as First Citizens branches from Monday, the 27th. SVB is a startup-friendly bank for the past 40 years or more, and without it, Amazon, Cisco, and LinkedIn wouldn't have existed today either. Amazon desperately needed operating funds in 1996, right after its founding, and its founder, Jeff Bezos, ran around to get a loan, but was rejected one after another. But SVB was willing to lend to Amazon and not let Amazon, today called Big Tech's flagship, disappear. The main character who cultivated the cradle of numerous innovations has now disappeared into the back of history.