Silicon Valley Bank's "sudden death", what warning does it have for the encryption industry?
Original source:Xiao Sa lawyer
Summary of reasons for Silicon Valley Bank's bankruptcy:
Direct cause: maturity mismatch, short-term debt and long-term investment
The root cause: economic downturn→printing money to save the market→inflation→Fed raising interest rates to curb inflation
In recent days, a major event that has spread widely in the U.S. capital market has occurred:With a glorious history of 40 years, Silicon Valley Bank, which has won the Forbes 2023 "Best Bank in America" award for five consecutive years, has declared bankruptcy.In particular, this incident not only caused an uproar in the traditional financial market, but also because of Silicon Valley Bank’s special family history and status in the world, the financial technology and virtual asset circles that are deeply involved in it are also wailing everywhere, almost bringing the stablecoin giants USDC enters a death spiral together. Although the systemic crisis has been resolved with the Federal Reserve and the Federal Deposit Insurance Corporation (FDIC) working together to get the bottom line, we can still learn a lot from this incident.
Today, Sister Sa’s team will talk to you in an easy-to-understand way about the whole story of this bankruptcy case and what impact it may have on the virtual asset industry in the future.
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Direct cause: maturity mismatch, short-term debt and long-term investment.
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(1) The amazing life of SVB
To say that this American SVB (Silicon Valley Bank, hereinafter referred to as "SVB") is not an unknown local chicken and dog on the street. In the autumn of 1983, Bill Biggerstaff and Robert Medearis, two investors from Wells Fargo, one of the four largest banks in the United States, noticed with a keen sense that the vibrant Silicon Valley was gathering the world's brightest minds with its unique advantages. Young people with the most innovative spirit. In the near future, this place will become the most cutting-edge technology highland in the United States and even in the world. As a result, a large number of top technology companies will be born. These technology companies must have huge financial needs.
Therefore, the two decided to establish a bank on this land that specializes in serving the venture capital circle, deeply cultivating the emerging technology industry, and SVB came into being. And this is the main reason why SVB is deeply involved in the virtual asset industry:Many blockchain technology companies and virtual asset projects have benefited from SVB in the initial stage, and chose to continue in-depth cooperation with SVB after they matured.At present, circle, a16z, Ripple and other big players in the virtual asset industry have deposited a lot of money in SVB. It is rumored that a16z's deposit in it even exceeds 3 billion US dollars.
Before the collapse of the house, SVB had at least helped more than 30,000 start-ups around the world to raise funds, had close business relationships with 600 venture capital institutions and 120 private equity institutions, and accounted for more than 50% of the start-up credit market . With the growth of the number of customers and the market, SVB's business scope is also expanding. The assets under management before bankruptcy have exceeded 200 billion U.S. dollars, ranking 43rd among all banks in the United States, and for five consecutive years. Forbes "America's Best Bank" Bank Award".
So how did such a behemoth collapse in just 48 hours?
(2) Fatal maturity mismatch and short-term debt long-term investment
Although the terminology is abstruse, the concept is not complicated. Let us first explain to you what is called "maturity mismatch" and "short-term debt long-term investment" in plain language.
A simple example: Xiao Ming is a relatively conservative person in terms of financial management, so he chose to deposit a three-year time deposit in Bank A in order to obtain a bank interest that is not much but has a stable expected return . However, if Xiao Ming wants to make money, Bank A also needs to make money. So at this time, the only way for Bank A is to effectively use Xiao Ming's deposit to create income that exceeds the interest paid to Xiao Ming, and the excess can become its own profit.
Everyone understands the truth, but how to operate it?A simple and effective way is to use Xiao Ming's funds to lend. As long as the loan interest is higher than the deposit interest, the bank will naturally make a profit.However, there is a problem with lending: the current economic situation is not good, and the bad debt rate is high. Once the funds released cannot be recovered, it will not be a loss for the wife and the army. Therefore, Bank A came up with another way: use Xiao Ming's money to "fish for a long time", and invest in some products that are stable and have a rate of return that can outperform Xiao Ming's interest rate (for example: ten years 20-year treasury bonds), you can make a good deal of lying on the money to make money.
At this time, (on the asset side) Xiaoming’s deposits mature in three years, and (on the liability side) the products invested by the bank take ten or twenty years to mature. In this situation where the maturity of the asset side does not match the maturity of the liability side, we will Call it "term mismatch"; Xiao Ming's short-term (three-year) deposit in Bank A is the so-called "short-term debt", and Bank A's investment of this money in other products with a long return period is the so-called "long-term investment". The operation is as fierce as a tiger, and the purpose of the bank is to create a "deposit and loan spread" and use other people's money to make its own money.
At this time, some people may have doubts: Xiao Ming’s deposit matures in three years, and Bank A invests in products that mature only in ten or twenty years. What if Xiao Ming’s deposit matures and withdraws money? You know, that is a bank. As long as there are enough people depositing every day, you can easily cover Xiao Ming's "short-term debt" with liquid funds, without affecting the future income of long-term debt. Hello, hello, everyone.
Back to SVB. A few years ago, in order to stimulate the economy, the Federal Reserve implemented a relatively loose monetary policy for a long time, and the interest rate on bank deposits was extremely low. Also very short. Then Silicon Valley Bank took this money to buy a lot of U.S. Treasury bonds with a yield period of more than ten years (the yield is about 1.6% -1.8%), betting that there will be no global events that will cause a major economic contraction in the future, and the Federal Reserve Loose monetary policy will continue to be implemented for a long period of time. If the bet wins, after more than ten years, this guaranteed business will allow SVB to eat a huge deposit and loan spread.
It is this gambler mentality that laid the groundwork for SVB's collapse today.
(3) There are no winners in the epidemic
The root cause of SVB's collapse is actually the global economic downturn caused by the epidemic.Under the pressure of the epidemic, various industries have been severely hit and the unemployment rate has skyrocketed. Not only has the U.S. economy shrunk, but many middle- and lower-class people cannot even afford to rent a house. In order to solve the suffering of people's livelihood, the U.S. government has to adopt a simple and crude but effective way of directly (printing money) to send money to rescue the precarious people. In this way, under the superposition of the impact of the previous US dollar quantitative easing policy, it has created an ultra-high inflation rate that has been rare in the United States for decades, and it once reached more than 9% in July 2022.
Under the high inflation rate + high unemployment rate, the Fed has no choice but to raise interest rates frantically.In addition, as mentioned earlier, most of the bank’s main service targets are American technology start-ups & mature technology companies. Under the epidemic, the market performance is poor, and technology companies are no longer rich. Started to withdraw deposits from SVB, resulting in a large loss of deposits, and liquidity began to be stretched.
At this time, the Fed's interest rate hike became the straw that broke the camel's back: depositors eagerly wanted to withdraw their money and transfer it to places with higher interest rates, but due to the large amount of funds used by SVB for maturity mismatch short-term debt and long-term investment , There is simply no way to spend so much money to pay depositors. There is no way, SVB can only sell the long-term bonds and other assets it bought before, in exchange for liquidity to pay depositors. but! After the Federal Reserve raised interest rates, the market interest rate has been much higher than the interest rate when SVB bought long-term bonds at that time. Your 1.6 and 1.8 bonds are now smelly and long. Who will buy them? But SVB does not sell and has no money to pay depositors, so it can only continue to trade at a loss.
Selling at a loss is not a big problem in itself, as long as we keep a good reputation, we may not be unable to earn back after a while. However, in this era of information explosion, paper cannot contain fire. As soon as the news of SVB selling long-term investment properties at a loss came out, it immediately aroused the worry of depositors about their own savings: if they sell long-term investment properties at a loss, SVB must be out. Big question! So everyone went to ask for their savings back, and finally a stampede happened, and SVB fell down completely.
02. The latest developments: the Federal Reserve puts out the fire
The incident has fermented so far, and it has reached the point where the Fed has to take action. As we all know, finance is a circle. The bankruptcy of SVB will not only affect SVB itself and its depositors. Not only will many banks, investment companies, and technology companies be hit hard, but it will also seriously affect the public's confidence in the entire financial industry and the banking system. Other banks also face the risk of depositors collectively demanding cash.
Fortunately, mankind has learned lessons from many financial crises and established a deposit insurance system. The U.S. Federal Deposit Insurance Corporation (FDIC) provides insurance for up to $250,000 per account (that is, a maximum compensation of $250,000 per account), and the FDIC has currently created a bank called the "Santa Clara Deposit Insurance National Bank (DINB) ” entity into which SVB’s deposits are transferred to protect customers, and all insured depositors can withdraw insured deposits. But what about deposits of more than $250,000 in the accounts of numerous technology companies? The FDIC is simply a drop in the bucket, perhaps considering the harsh words released by the US government: "Ensure that Web3 happens in the United States",On March 13, the Federal Reserve released a clear message: all inclusive.
03. Warning to the virtual asset industry
The SVB bankruptcy incident actually had a very profound impact on the virtual asset industry. USDC, the current second-largest USD stablecoin after USDT, was almost brought into a death spiral by it (a large number of secondary stablecoins anchored to USDC are all terrified. trembling). This is mainly because Circle, the issuer of USDC, still has a huge reserve of up to $3.3 billion in SVB, accounting for about 8% of the total USDC reserve. Although the Federal Reserve’s bottom-line operation really saved USDC, we have to reflect:Why are there always stablecoins in the virtual asset industry? Does this kind of virtual currency that anchors real assets outweigh the disadvantages or the disadvantages outweigh the advantages?
Sister Sa’s team does not make value judgments for the time being, but if you are an old player who has been paying attention to the virtual asset industry at home and abroad for a long time, you must be familiar with the FTX bankruptcy event at the end of 2022. In the view of Sister Sa’s team, all but one of the two bankruptcy cases of SVB and FTX occurred There is not much difference between the traditional financial industry and the virtual asset industry. It's essentially a problem (and an old problem in the traditional financial industry): lack of transparency. It is foreseeable that this chronic disease will continue to exist for a long time to come.
Finally, we categorically oppose a point of view: the failure of traditional banks proves that people should put their eggs in the basket of virtual assets.There is no causal relationship between the two. Deliberately exaggerating the disadvantages of the traditional financial industry to tout virtual assets is a slippery slope fallacy. What needs to be reminded is that there are not a few virtual asset exchanges that go bankrupt. What investors should really do is to maintain a calm mind and long-term stable emotions.
