Hello everyone, I'm Lao Gao. Recently, Silicon Valley banks and signature banks have failed one after another, causing a strong shock in the financial circle. This was the second major bank failure in U.S. history, the first being the Lehman Brothers incident in 2008. It is worth noting that the collapse of these two banks in three days has heightened fears of another financial tsunami. The collapse of U.S. banks will not only affect the United States, but will also have a profound impact on the global economy. Especially when the epidemic has just been brought under control, if another financial crisis occurs, it will have a great impact on people's lives.
To better understand the background of these two banks, let's first introduce their basic information. The first is Silicon Valley Bank, which is a large bank located in Silicon Valley in the United States. Its main business is to provide banking services to venture capital firms and technology companies in Silicon Valley, including well-known companies such as Apple, Google, and Facebook. According to statistics, more than half of the science and technology companies in the United States have business with Silicon Valley banks. This is followed by Signature Bank, a small bank based in New York, USA, founded in 2001 that provides private banking services primarily to high-net-worth clients. In addition, it is engaged in the cryptocurrency investment business. These are two banks that had a good reputation in the industry, and suddenly failed. Are they not insured? The fact that banks automatically purchase insurance when they open an account is one of the things these two banks have in common.
Silicon Valley Bank is a large bank located in Silicon Valley in the United States, which mainly provides banking services to venture capital firms and technology companies in Silicon Valley. Its customers include Apple, Google, Facebook and other well-known enterprises. According to statistics, more than half of the science and technology companies in the United States have business with Silicon Valley banks. Signature Bank is a small bank established in 2001 that provides private banking services to high net worth clients. In addition, it is engaged in the cryptocurrency investment business. These are two banks that had a good reputation in the industry, and suddenly failed. Are they not insured? The fact that banks automatically purchase insurance when they open an account is one of the things these two banks have in common. Since March 17, 2022, until March 23 this year, the Fed has raised interest rates nine times, raising a total of 475 basis points, from 0.25% to 5%. As a result, almost all banks around the world are raising interest rates, with the exception of Japan. The governor of the Bank of Japan believes that if the Bank of Japan raises interest rates, it will be devastating to the Japanese economy, so it chooses not to raise interest rates. On the surface, this is a good thing for the average saver. However, for banks, raising interest rates makes it difficult to lend loans, interest rates are too high, goods are difficult to sell, banks cannot make a profit, and in turn need to pay more interest to depositors. As a result, most banks were in the red year from last year to the present year.
Why is the Fed raising interest rates? In fact, this is to curb rising prices and inflation. Why is inflation in the US? As a result of two important events at the beginning of last year. The first was the Russian-Ukrainian war on February 24, which affected global trade and logistics, causing prices to start rising, especially in Europe and the United States.
At the same time, another thing also accelerated the rise in prices, but it seemed less obvious. This is a large-scale lifting of epidemic prevention and control. The United States began to lift epidemic prevention and control at the beginning of last year. The timing of the end of the epidemic varies from country to country, with Europe and the United States lifting control earlier, while Asia lifting control later. Japan still wears masks, and most people think that the epidemic is not over, but in Europe and the United States, people have long taken off their masks and returned to normal life.
This happened mainly at the beginning of last year, is there anything bad? After the epidemic ended, people returned to normal life, material needs increased rapidly, and people began to eat, drink, travel, and shop like three years ago. This situation has led to the dual impact of shortages and increased demand.
How serious are the price increases in the United States? According to data from the Visual Capitalists website.
If you don't have money, you can borrow money from me.
I can help you with some problems. So much? Yes, the price of eating has risen a lot. Can be solved.
Inflation was 65.7 per cent and public transport prices rose by 4.5 per cent. These are all commodities directly related to people's livelihood. In fact, many people feel that prices have risen a lot. In general, it takes 5 to 10 years for a 10% price increase. However, this year's price increase has been much higher than that, and not only that, but the quality of goods has also been reduced. This shows that the market demand is expanding, but the supply is far from enough, resulting in skyrocketing prices. However, wages for most people are not rising rapidly, which leads to a deterioration in the economic situation of most families and may even lead to economic recession and social unrest.
To avoid this, the Fed decided to raise interest rates. How to control prices with interest rate hikes? First, increasing interest rates can effectively discourage lending. Loans are often used to buy expensive goods such as houses, cars, and valuables. Therefore, those who buy goods with loans or installment payments will spend less. However, people in Europe and the United States are accustomed to installment payments and loans to purchase goods, which can effectively curb consumer desire, thereby reducing market demand.
In addition, if the market demand increases, many people may choose to start a business, which requires a loan. Increasing interest rates can curb their willingness to start a business. Does this create a vicious circle? In fact, this is to prevent the economy from overheating.
If everyone wants to buy something, then the price will rise, which is a sign of economic prosperity. However, this should happen slowly, not suddenly. Therefore, this needs to be suppressed. In addition, after rising interest rates, people are more willing to save than spend. Therefore, it is also a way to control prices.
From 2020 to 2022, the world's major banks have been in a state of low interest rates because they need to stimulate the economy and consumption. At that time, due to the epidemic, everyone was reluctant to consume, which led to the closure of many manufacturers. Therefore, to stimulate consumption, they encourage people to buy expensive goods. However, after the epidemic passed, people's desire to consume increased, but prices did not rise rapidly.
Therefore, the Fed had to raise interest rates to curb consumer desire, but this led to the problem of commodity shortages. In Europe and the United States, it has become more difficult to buy goods due to rising transportation and logistics costs. Therefore, there have been two rate hikes this year, but the problem remains unresolved. This is the root cause of the collapse of Silicon Valley Bank and Signature Bank.
Why are only these two banks failing? That's because their customers are mainly investors and innovative businesses, who made a lot of money during boom times. So they poured money into Silicon Valley Bank, leading to its rapid growth. However, as a bank, it needs to pay interest and therefore invest.
There are two main aspects of bank investment: lending and buying long-term assets.
As a result, Silicon Valley banks bought U.S. Treasury bonds and real estate mortgage-backed securities, which are not important in nature and can be understood as real estate.
We can think of Silicon Valley Bank as a man who saved a fortune ten years ago and invested in some tech ventures, and he made a lot of money in those ten years. Now that he had more money, he wanted to know what to do with it. So he decided to spend 35% of his money on lending and 55% on buying real estate. He believes that real estate is a relatively stable investment, so he also keeps 10% of his funds for consumption.
He bought something he liked and also bought a house. While real estate is a long-term asset with poor liquidity, Silicon Valley Bank isn't worried about that because it's been making money for a decade without any turmoil. He thinks 35 percent of his money is enough for a variety of situations.
As a result, in 2022, an exceptional circumstance occurred and the Fed began to raise interest rates. This has affected Silicon Valley Bank's lending operations as lending rates have risen while deposit rates have remained unchanged, making lending operations unprofitable. In addition, rising interest rates have also led to a decline in the value of long-term assets, and people are reluctant to buy property because the cost of buying a home has risen.
People need a loan when buying a property, and if interest rates rise, they need to pay more interest, which affects their willingness to buy. In addition, the rate of return on real estate may not be able to offset the interest paid to the bank, so house prices may fall.
In the past, many people borrowed from banks to buy large amounts of property and then rent them out. This is because the rent can offset the interest on the loan. But if interest rates rise, rents may not be able to offset interest, which will cause house prices to fall. Japan is an example of a situation where people are reluctant to buy property if interest rates rise, instead keeping their money in banks.
As a result, rising interest rates are a double whammy for Silicon Valley Bank, as its lending operations are not profitable and the value of its long-term assets is falling. In a low-interest rate environment, Silicon Valley Bank's asset allocation is completely designed for a low-interest rate environment.
In particular, 50% of those Treasuries and real estate securities indicate that Silicon Valley Bank did not take into account the possibility of continued rate hikes by the Fed, none of which were taken into account. In fact, this is not because they are unprofessional, all banks conduct risk simulations when allocating assets and consider various scenarios.
Almost all scenarios are taken into account, and the Monetary Authority regulates the allocation of bank assets. If the Monetary Authority deems the asset allocation unreasonable, they will also urge the banks to adjust. If the MAS doesn't say anything, it means that asset allocation is generally okay and safe in most cases. No one expected a sudden clash between Russia and Ukraine. Judy had predicted this scenario, but he didn't keep up with the news, and no one expected that the low interest rate environment in the United States would rise by 475 basis points in just one year. Now, let's discuss a situation that no one expected. Why are only these two banks failing? Both banks are unique in that they both serve venture capital firms, high-tech companies, and high-net-worth individuals. This is the main reason for their collapse.
Let's illustrate this with an extreme example. Suppose there are two banks, they are the same size and the total amount of deposits is the same, but one has 100 customers, each deposit 10,000 yuan, a total of 1 million yuan; The other had only one client, a high-net-worth individual, who deposited $1 million. Which bank do you think is riskier? A bank with only one customer, and as soon as he withdraws money, the bank fails. This is the case with these two banks, which, although they do not have many deposits, each account is very rich.
As I said earlier, the average deposit per account exceeds 10 times the amount guaranteed. In particular, more than half of Silicon Valley Bank's assets were purchased with treasuries and real estate, which could not be cashed out. If a customer wants to withdraw money, the bank faces bankruptcy. All banks are very worried about the run. If everyone withdraws money together, banks face a crisis.
However, for banks that are oriented to the general public, with a large number of customers, it is less likely to withdraw money together. So, are these two banks mass-oriented? They have a low deposit threshold, but most deposits are still for high-net-worth individuals. Signature Bank is even a private bank.
So, why should these customers withdraw their money? The interest rate of the bank is so high, it is not reasonable to withdraw money, right? Since the second half of last year, prices have begun to rise rapidly. However, most people's wages are not rising rapidly, which has led to a deterioration in the economic situation of many families, which can lead to economic recession and social unrest. To prevent this from happening, the Fed decided to raise interest rates. Why can interest rate hikes control prices? First, raising interest rates can effectively discourage lending. Loans are generally used to purchase expensive goods such as houses, cars, and luxury goods. If interest rates rise, these people will borrow less. I personally rarely buy goods through credit card installments or loans, but in European and American countries, many people are accustomed to buying goods in installments or loans. If interest rates rise, they consume less. In addition, if more people want to start a company, they also need loans. If interest rates rise, they won't start a company easily.
It's a vicious circle. This is to prevent the economy from overheating. Prices only rise when people want to buy something. Therefore, it is a good thing that the economy is overheating. However, economic overheating should be slow so that it can be better controlled. You can't take out a loan, so you can only delay the problem a little, but not solve it.
Therefore, the collapse of Silicon Valley Bank was the result of a chain reaction that began with the Russian-Ukrainian war and the end of the pandemic. Two things caused prices to skyrocket and inflation to rise. In order to curb rising prices, the Fed had to raise interest rates, which led to the trouble of businesses that borrowed for a living and needed a lot of loans, starting to lay off workers and reduce borrowing. The main object of these corporate withdrawals is Silicon Valley Bank, but unfortunately, due to rising interest rates and depreciation of assets, Silicon Valley Bank has fewer cash reserves, and in order to prevent being hollowed out, it has to sell a large number of long-term assets at low prices, which leads to more customers running on the bank, which eventually leads to the collapse of Silicon Valley Bank. This is not a simple cause, but the result of a combination of irresistible factors. Indeed, both Silicon Valley banks and signature banks have some unique characteristics that make them particularly sensitive to this situation and the first to fail.
However, if the Fed continues to raise rates, other banks will face the same problem. As long as interest rates are raised, banks will lose money, and no one can hold it for a long time. Similar events have occurred in the United States in the past, during the savings and loan crisis of the 80s and 90s of the last century. At that time, there was a bubble in the housing market due to low bank interest rates. In order to control the rise in house prices, the Fed has continuously raised interest rates, reaching a maximum of 20%. Over the next 15 years, nearly 3,000 banks or credit institutions in the United States failed. Of course, this is not a one-time event, but a continuous occurrence over the course of 15 years. Historically, we can see that the United States does not seem to care about bank failures, even if they fail by a few thousand.
Therefore, there are fears that this time the Fed will take the same attitude and continue to raise interest rates even if the banks fail. As can be seen from the Fed's response this time, when the second bank fails, it directly announces that it will take over completely. In contrast, during the last savings and loan crisis, the United States did not take over it all. Therefore, the current incident appears to have been resolved, but in fact there may be potential risks. If the Fed continues to raise rates, what may happen in the future is uncertain. The crisis can be lifted only when prices fall. If there are any future events that could lead to higher prices, such as wars or unpredictable events such as an asteroid hitting Earth, the financial crisis could flare-upt again. In short, we need to have a certain risk awareness of the bank. Banks are commercial institutions and need to be profitable. Similar to other commercial institutions, banks are exposed to risk. Nevertheless, we can still reduce risk through reasonable asset allocation.
After this crisis, prices rose rapidly for two things. One is Bitcoin and the other is gold. Although the increase is not large, both real gold and digital gold have risen.
However, Silicon Valley Bank is not aware of this risk. It has been profitable for a decade and believes that U.S. deposits will never be affected. This thinking is overly optimistic. That is why, in 2022, the interest paid annually cannot be used to lend because the need for loans decreases. This has also led to higher interest rates for savers.
In addition, rising interest rates can also cause people to be reluctant to buy property because they need to pay higher interest rates to buy a house, which will lead to lower house prices. This has already happened in Japan. Therefore, Japan does not dare to raise interest rates easily, so as not to affect house prices.
Rising interest rates have dealt a double whammy for Silicon Valley banks. The cash portion cannot be used for lending, and the value of fixed assets is declining. This suggests that there is a problem with the asset allocation of Silicon Valley Bank. However, in most cases, this problem is not serious.
In short, we need to have a more comprehensive understanding of the risks and take appropriate measures to reduce them. Who would have expected interest rates to soar by 457.15 basis points in just one year? What were the reasons for the failure of these two banks? The biggest difference between Silicon Valley Bank and Signature Bank is that they hold a large number of silicon stocks and high-net-worth clients, which is also the main reason for their bankruptcy.
Let me give you an example, let's say there are two banks with the same deposit, but different newspapers. There are 100 depositors in one household, each of whom has saved 10,000 yuan, for a total of 1 million yuan. The other had only one high-net-worth client and had saved $1 million.
Which bank do you think is riskier? This bank has only one depositor, and once this customer withdraws money, the bank goes bankrupt. The situation is somewhat similar in these two banks, with not many deposits, but each account is very rich. As I mentioned earlier, the average deposit in each account exceeds ten times the amount guaranteed, especially Silicon Valley Bank, where more than half of its assets are invested in Treasuries and real estate and cannot be cashed. If depositors ask for money and the bank does not have enough cash, it has to fail. In general, banks rarely face a run on ordinary depositors because they have many customers and the possibility of withdrawing money together is small. The two banks are also geared towards the masses, but they absorb less than 7 percent of deposits, mostly private banks for the super-rich.
For this question, I think the money should be kept in the public bank, although relatively safe, the rate of return may be lower. It is unreasonable if the customer wants to take away such a high interest.
In fact, since the second half of last year, we often see news of layoffs from technology companies on TV. For example, how many people did Facebook layoff? How many people did Amazon layoff? Google and Twitter are also laying off jobs.
Yes, tech companies have entered a cold winter since last year, many large companies have laid off employees, small companies have been more difficult, and many small businesses have closed.
Silicon Valley Bank's customers are all these tech companies, so when these companies face operational difficulties, they start withdrawing money to tide over the financial difficulties. Since Silicon Valley banks had very little cash, they quickly ran out of cash. After discovering that the situation is not good, they can only sell some long-term assets, but these assets are depreciating and they can only sell at a low price.
When banks sell assets, other depositors start to worry because they know that there is only one possibility that the bank can sell its assets, and that is that it is about to fail. And deposit insurance in the U.S. is only $250,000, so when they sell their assets, depositors start withdrawing money, which leads to their bankruptcy.
The day before the collapse, on March 9, they had to withdraw $43 billion, or a quarter of their total assets. Sometimes total assets are not enough to cover withdrawal needs, which indicates that serious opportunities have emerged. The next day, the bank collapsed. Although banks look very powerful, they are afraid of a run because once people come to withdraw money, no bank can afford it. But don't these Silicon Valley bigwigs know about this problem? If they do, they will lose all their funds. You say, will they still think about others? They will think about themselves first, because they will take it out first, even if their operation is difficult. A quarter of the people were in line, and they were all on their way. Of course, some may wonder if banks can't make up for the lack of cash by raising deposit rates to attract depositors. But in fact, this will not solve the problem, but may lead to more serious consequences. If you raise interest rates, how do you pay that money? You can't make money because loans can't be issued. This only delays the problem, not solves it.
In short, the collapse of the Silicon Valley Bank is the result of a series of chain reactions that switch from the Russian-Ukrainian war and the end of the epidemic. These two things led to rapid price increases and inflation. In order to curb rising prices, interest rates can only be raised every year, which has led to difficulties for venture capital companies that live on loans and science and technology companies that need large loans, and they have begun to lay off employees and start withdrawing money. The main object of their withdrawals is Silicon Valley banks, which have relatively little cash and long-term assets depreciate due to rising interest rates. To avoid being hollowed out, Silicon Valley banks had to sell a lot of long-term assets at low prices, which led to more customers coming to run on the bank, which eventually led to the bank's collapse. Therefore, this is not a single cause, but a combination of a series of irresistible reasons. While Silicon Valley banks face this situation, other banks will face the same problem, as long as interest rates rise, banks will lose money, and no one can afford it for a long time. Something similar has happened in the United States before, with a banking crisis in the eighties and nineties. In the seventies of the last century, bank interest rates in the United States were low, which led to a housing bubble and rising house prices. In order to combat rising house prices, interest rates are raised every year, reaching a maximum of 20%.
However, over the next fifteen years, nearly 3,000 banks or credit institutions in the United States failed, not all at once, but over 15 years. Through this history, we can see a very scary fact that the Fed seems to be raising interest rates only to suppress prices, and the collapse of banks is accidental, and even the collapse of 30,000 banks has not caught their attention. Therefore, there is a great concern that the Fed will do the same, that is, it will continue to raise interest rates regardless of whether the bank fails or not. As can be seen from the Fed's response, when the second bank fails, it directly announces that it will bear all the losses. What does this mean? In fact, it knew for a long time that banks would fail, so it didn't need to think too much about policy. For us, it was a contingency, but for them, it was expected. So, will they continue to bear all the losses? This is not certain, because in the last crisis they did not bear all the losses. So, although this crisis has passed, there may be potential problems. If the Fed continues to raise interest rates, it could lead to a financial crisis. How to solve this problem? Only by waiting for prices to fall can the crisis be eliminated. If any future event occurs that could lead to an increase in prices, such as construction or natural disasters, the financial crisis could flare-up. Finally, I would like to say, what is your impression of the bank? A bank is essentially a commercial institution and is not much different from other commercial establishments, such as restaurants, companies, or restaurants. They all need to make money, but they use our money to make money and share the profits with us.
If they lose money, they will compensate us for the loss. Therefore, we need to maintain a certain risk awareness of banks, because they will fail just like normal companies. Especially in the case of inflation, banks are particularly worried about inflation. This is why the price of both gold and digital gold has risen sharply after this crisis. So, what is the practical point of decentralization? Yes, it is very relevant. Silicon Valley's banks are controlled by wealthy business magnates. Don't they have any news? Why should they wait until a few teams to withdraw money? Those bigwigs have long since been taken out because their assets were acquired by Apple. You see, did Apple go out of business? No, because Apple wasn't affected because they didn't use Silicon Valley Bank's services. Those bigwigs are richer than us, but they haven't reached the level of wealth at the level of bigwigs. So, how do we prevent this from happening to us ordinary people? It's better not to put all your money in the same place. If you don't have more than $250,000 in your account with each bank, there is no problem. If you can't let go, then you're too confident.