1. What kind of business does a Silicon Valley bank do?
The bank’s business model has its roots in the ecosystem of tech startups and investment funds investment capital that fueled its growth, a development that has exploded in recent years.
Over the past four years, the Bank of California has grown exponentially, as has the tech sector it financed: deposits have risen 200% to a peak of $220 billion. By comparison, those of JP Morgan, one of the Big Four US companies, increased by about 50% in the same period. “Svb has effectively concentrated on one sector and one geographic area, the innovative companies sector in California, a model that does not really exist in Europe,” says Stefano Caselli, dean By Sda Bocconi.
2. What triggered the crisis?
The increase in liabilities (such as deposits and financing) prompted SVB to seek higher returns in years when returns were very low, and to invest in securities with longer maturities – more than 5 years – such as bonds. “With the rapid change in the course of monetary policy in the United States of America and the consequent increase in interest rates – explains Giovanni Sabatini, General Director of ABI – an imbalance arose between the term of short-term deposits and the portfolio of long-term and fixed-rate securities, which fell value as a result of rising interest rates. Up until that point, that is, until no one started withdrawing deposits, the mismatch seemed manageable for Svb.”
3. What prompted customers to withdraw their funds?
“Innovative companies are strong absorbers of cash because they invest so much,” Sabatini explains, “and higher interest rates have made it more expensive to finance themselves. Hence the rush of startups to withdraw their deposits and the spread of fears about the stability of the bank. ” The result is the “banking outflow”, that is, the outflow of deposits, which is typical of financial crises.
4. Why was Svb unable to return the deposit?
The institution did not have sufficient liquidity reserves.
5. Why didn’t she have enough liquidity?
This is where the rules of the banking sector come into play. “The Basel III framework provides two key indicators for banks – says Sabatini – in addition to an indicator of the strength of capital, known as the Cet1 ratio. The rules of the banking system also provide for the liquidity index, and liquidity coverage ratio and the The net stable funding ratio Institutions must respect it. And it must have a value greater than 100. When Basel III was adopted, the US chose to exempt some banks from adopting these ratios which are respected instead by large US institutions, which do not appear to be affected by the issue.
6. What do these indicators measure?
The first is a short-term indicator and indicates the number of days that the bank can cover its liquidity needs with its reserves. The second measures the ability to balance assets and liabilities.
7. Could such a situation occur in Italy?
The belief is that something similar cannot happen because banks adhere strictly to the rules of Basel III. In Italy liquidity coverage ratio is 160% while The net stable funding ratio It’s 130%, which is well above the required 100%, according to the ABI. In general, European banks have 3 trillion excess liquidity, equal to a quarter of deposits.
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