How did a bank ranking on the list of American Best Banks for five straight years collapse in your viewpoint?

Professor Andreas Stoffers, country director of the Friedrich Naumann Foundation in Vietnam

Just before March 10, Silicon Valley Bank (SVB) was the 16th largest in the US. It had taken four decades to build and its parent company SVB Financial Group. However, it took only 36 hours to completely dismantle.

SVB was forced to sell assets at a loss to pay for withdrawals from venture capital funds and tech startups. However, this led to massive withdrawals, while SVB was facing many difficulties, which left it unable to pay its debts, leading to bankruptcy on March 10.

Dark memories of the 2008 financial crisis returned and this crisis did reach other banks in the US as well. Many questions remain unanswered, such as why bonuses were still being paid to management shortly before the bank collapsed and why the CEO was still gold-plating his shares in January 2023. There is also the question of what role central bank policy plays.

Nearly $175 billion in customer deposits were placed under the regulator’s control and it has been taken over by the Federal Deposit Insurance Corporation (FDIC). A new institution was created to transfer all deposits to it. All insured deposits were paid in full on March 13. For uninsured accounts, the interest was paid on March 13 and the rest will be paid in instalments when selling the bank’s assets.

What is the background as to why this happened?

Originally, the idea behind the creation of the SVB was groundbreaking. The goal was to build the bank as a top financial in the startup world. As a result, the bank was virtually flooded with money, especially during the pandemic tech boom.

SVB was on an aggressive growth path, characterised by a huge appetite for deposits on the one hand and risky investments on the other. One of the problems was that SVB supported its clients not only with venture capital, but also with debt capital.

Another important exogenous factor is the big dilemma with the US Federal Reserve’s interest rate policy. In recent years, the market has been fuelled by an aggressive policy of lowering interest rates to the point of zero interest. The money supply increased massively in the US and other countries. The disastrous consequences of this monetary policy are obvious: profit margins shrank in both the savings and credit sectors.

To achieve a reasonable return, loans were granted recklessly. Incidentally, this refers not only to the SVB but to the entire banking system.

In addition, external exogenous factors such as the pandemic, and the supply bottlenecks associated with interrupted value chains or the Ukraine-Russia conflict have increased inflation in the past few months. These problems cannot be blamed on SVB alone, and clearly have systemic causes. Many years of artificial low, zero, and partly negative interest rates outside the market have led to a problem in many economies.

The question will now be, whether the Fed will continue with its policy of increasing interest rates to curb inflation and thus accept the collapse of companies and banks, or whether it will return to its expansionary monetary policy and raise interest rates in order to at least gain sometime.

Will there be any impacts of this dismantling on other markets?

The scale of SVB is not large enough to create a domino effect. It mainly lent to technology startups and healthcare companies located in the Silicon Valley area. In addition, the FDIC acted in time to prevent contagion, and depositors were fully protected.

For tech startups and companies in the US and in countries with SVB’s branch systems (such as Canada, Germany, the United Kingdom, China, Israel, and India) there were initially many worries regarding where to get investment capital in the future. However, in the US, the problem seems to have been solved.

Investment in the technology industry is still a priority for US policy, so it will certainly have no difficulty in finding an alternative source of funding. SVB’s branches in other countries and a joint venture in China are relatively independent and proactive in their own territory. However, there have been many changes in the system as well. For example, many Chinese startups and fund managers moved money out of SVB in the US and into the UK branch of SVB, which was acquired by HSBC.

On the other hand, the downfall of SVB will also likely focus on startups to be more profit driven and more disciplined with their spending.

There is no direct impact from SVB’s bankruptcy in Vietnam as we and our business have no relation to SVB or technology companies related to it. After rather high inflation of a decade ago, Vietnam’s central bank pursued a monetary policy that can be described as largely sound. Unlike, for example, the Fed and European Central Bank, Vietnam did not have a disastrous zero interest rate policy despite the struggles of recent years and the associated weakening of the economy. As a result, the State Bank of Vietnam was able to retain its maneuverability.

SVB’s bankruptcy as the Fed’s interest rate increased sharply is another warning to refrain from a market-distorting zero interest rate policy. The banking system of Vietnam should pay attention to risk control when mobilising short-term capital for medium and long-term investment.