Andy Spero shares some of his thoughts on the Silicon Valley Bank collapse below — join the conversation on LinkedIn.
On Friday, I was interviewed about the Silicon Valley Bank collapse.
Many of the points I raised have been described elsewhere, except this one. So far, the fiasco has been described in terms of (previously neglected) structural interest rate risk and liquidity risk, but there seems to be a credit aspect, too.
It’s hard to believe that SVB didn’t try to borrow from the lender of last resort, the Fed, prior to selling some of its securities at a massive loss, or even after that sale as deposits began to run. The bank would do this by pledging collateral — its loans — at the Fed’s discount window. However, it seems that the Fed didn’t provide the loan.
So, What to Conclude?
Only that the Fed didn’t like the collateral — viewing it as either uncreditworthy or unmarketable to other parties, or in starker, blunter terms, worthless.
Now, if the Fed views your loans as either uncreditworthy or difficult to sell, well, there’s a good chance that your loss forecast estimates have been too low, especially given the presumed borrower industry concentration.
With the FDIC’s receivership, there is now an additional issue. It’s highly likely that many of SVB’s borrowers are also depositors, and if those borrowers can’t access their uninsured deposits, then they have no liquidity either and, therefore, are less creditworthy than they were on Thursday. If they were struggling in February, then March (and possibly the spring) looks even bleaker.
BTW, what was the FDIC’s rush?
As I understand it, its mandate isn’t to protect all depositors, only insured depositors, and insured deposits of ~$8B were less than 5% of all deposits and were an even smaller share of all assets. Things would have to get a whole lot worse — e.g., California sinking into the sea — before that $8B was at risk. It seems that to save the $8B, it may have jeopardized a lot more than that.