The theme of these hours is the failure of Silicon Valley Bank (SVB), an institution specialising in providing services to US start-ups.

SVB : the Bank of Silicon Valley

The institute is relatively young - it was founded about 40 years ago - as its history coincides with the rise of the Californian star-up world. Before last week's collapse, it was the sixteenth largest institution in the US: not a major player, but not even a minor one, especially if you consider the client base.

The SVB, in fact, had conquered over time a very important part of the market: start-ups and venture capital funds, i.e. the whole world linked to technology and innovation that has changed the world over the last decade.

In any case, Silicon Valley Bank's failure is the second largest in US history, and the failure of New York's Signature Bank, which is being discussed as I write this, is the third largest.

The theme of these hours is the failure of Silicon Valley Bank (SVB), an institution specialising in providing services to US start-ups.

Star-ups are a complicated 'special' customer

So far so good, one would say, were it not for the fact that recent history has changed too dramatically. To understand this, we need to step back and look at the post-pandemic period when, thanks to the expansionary monetary policies of central banks, there was a veritable flood of cheap money that made the whole innovation sector grow rapidly. 

Between 2020 and 2021, there were many IPOs, i.e. listings of new companies on the stock market, and in general, the whole star-up segment continued to steam ahead with collections of billionaires and exponential valuations of companies.

All this money went straight into the accounts of companies that found Silicon Valley Bank the best provider ever. The injection of liquidity was unprecedented, so the bank's coffers were filled.

What do banks do when we deposit our money with them? There are strict regulations on where the funds go, in a super simplified way we can say that the capital is invested in safe assets to avoid problems in case they are suddenly needed. With central banks raising rates to counter inflation, the scenario has changed dramatically.

As a result, start-ups found it extremely difficult to raise new capital, taking on debt became particularly expensive and, as a result, the only source of survival became cash.

I stress for those who chew on these issues: a star-up is, by nature, a money-losing business in the early years of its life. Each month it pays suppliers and salaries until it succeeds in producing profits with the product or service it produces.

If these become scarce or expensive, as in our case, there is only one place to find them: in the cash box, that is, the company's safe, which has been properly filled in the last two years with a more favourable scenario.

In this way, therefore, step by step, slow outflows began which were then accentuated last week.

However, something was wrong !

The bank had the same problem that we, as investors, had a few years ago: bond market yields were very low, often negative, and to get into positive territory you had to limit yourself to long maturities.

The Fed was not able to offer much alternative because, in fact, it could not gamble with clients' money and, therefore, built a portfolio with long-dated US bonds.

The Fed's change in policy significantly decreased the value of previously issued bonds which, as banks generally know well unlike private savers, is only a problem from a market value point of view: by waiting for the maturity, in fact, you get the money back without incurring losses.

Moreover, Silicon Valley Bank, unlike other banks, had a special clientele: the start-ups mentioned above, precisely because of this change of scene, had and needed money.

Moreover, Silicon Valley Bank, unlike other banks, had a particular clientele: the start-ups mentioned earlier, precisely because of this change of scenery, had and needed money.

Indeed, at first the withdrawals were constant, then the panic of last week broke out because everyone in the environment started talking about the risks to which the bank was exposed.

The SVB also had to sell some positions with limited losses overall (we are talking about a few billion dollars) but then the panic took over and withdrawal requests for tens of billions of dollars came in.

At that point, the intervention of the authorities was necessary because the situation was no longer manageable.

Falling shares : fear for the banking sector ?

The news quickly reached investors who sold the bank's shares en masse, in the hours that followed in bankruptcy (the newspapers speak of bankruptcy, technically a procedure similar to "our" compulsory administrative liquidation is underway), and also the other banking stocks were infected by the sales driving the markets down between Thursday and Friday.

Furthermore, the weekend was particularly busy in the US because in the meantime there were fears for other banks - in fact, as I write, news of the failure of New York's Signature Bank for similar reasons has spread - and, in general, confidence in the general banking system was being questioned.

But why ? When we deposit money in the bank, whether we are individuals or businesses, we silently accept a kind of 'trade-off': the bank holds onto us so that, of course, we don't all rush to the counter to withdraw it en masse.

It is because, trivially, we are all relatively calm that this money will be there forever and, above all, we accept that the bank is a safer place than our mattress to deposit money. This is one of the basic principles on which the contemporary market economy has developed, but it's worth explaining it otherwise we miss a lot of it.

Coming back to the United States, there is a guarantee similar to our Interbank Deposit Guarantee Fund of $250,000: since we are talking about start-ups that have raised billions, we are really talking about small change. For this reason, the US authorities, after "taking control" of the bank, have assured that from today (Monday 13 March) it will be possible to withdraw money regularly.

"We are taking decisive action to protect the U.S. economy by strengthening confidence in our banking system," the U.S. Treasury said in a statement to signal an easing of the market.

So what happens now ?

Are we facing a systemic collapse ? For the moment, however, it is too early to say one thing for sure: it is a "whatever it takes" for the US authorities. There is no market economy without banks and the confidence of businesses and citizens in them: if that confidence is lost, we enter a scenario from the history books that we have not experienced as a humanity since, in the Renaissance, someone in Italy had the idea of inventing the very concept of banking.

Is this a new 2008 ? Not really, there is a fundamental difference: in 2008 there was a series of abuses on the part of the system, here at most there is negligence on the part of the bank management;

Is it possible that Silicon Valley Bank did not foresee that sooner or later the historic era of low interest rates would end ? Responsibility will probably be sought here. Also, it has to be said that the bank had too much of a sectoral clientele and it is never good for any company to have all the same type of customers: when things are going well, in fact, you grow but if a sector goes into crisis, there are huge problems and this is an example of a lack or insufficient diversification of the clientele.

But were the authorities asleep? Where were they? The general problem with regulation is that, however strict it is, it can never always predict everything and often only comes after the omelette is made. In this case, however, there is a responsibility in the handling of the case by the US authorities who in fact allowed a kind of exemption for "minor" banks from the strictest security parameters valid worldwide. The SVB and other 'small' banks were covered by this exemption.

But is it also the fault of the central banks that they raised rates? Probably not partly because of the decision to raise rates, but because of the late start of the manoeuvres that required a more massive shift. Of course, talking later from our desk is easy, but this aspect needs to be emphasised.

Will all start-ups fail and trigger an economic crisis? I think it's too early to tell and that the interventions of the US authorities will go in that direction. It is no coincidence that I said "whatever it takes" for the US.

Do we run a similar risk in Europe ? At the moment, it would seem not, because there are stricter regulations. Despite this, we cannot make too clear predictions on this, in such situations mass psychology can shift the balance in any direction. Certainly, the venture capital market will also be affected in Europe and we will see with what dimensions in the future.