Author’s Note
To clarify key concepts upfront:
- Monetary Easing :
- A central bank policy to stimulate economies by increasing money supply (e.g., cutting interest rates, injecting liquidity via tools like MLF). Historically, such easing boosts asset markets like real estate and equities.
- Monetary Tightening :
- The reverse: reducing money supply to curb inflation. The Fed’s recent rate hikes exemplify this, aiming to counter post-pandemic hyper-liquidity.
The Fed’s Rate Hikes: A Global Domino Effect
The Federal Reserve’s policies hold unparalleled global sway due to the U.S. dollar’s reserve currency status. Its 2022–2023 tightening cycle—raising rates from near-zero to 5%—triggered a liquidity crisis that culminated in Silicon Valley Bank’s (SVB) collapse. Below is a data-driven analysis, cross-referenced with historical parallels and market reactions.
Historical Context: Orange County’s 1994 Bankruptcy
Key Events:
- Post-1991 recession, the Fed hiked rates 7x in 1994, pushing the federal funds rate from 3.5% to 6.75%.
- Impact on Bonds: Rising rates crushed bond prices. Orange County’s treasury lost $2.1B on leveraged bond investments (including Treasuries), leading to bankruptcy.
Mechanism:
- Bond prices inversely correlate with interest rates.
- Formula: Bond Price = ∑(Future Cash Flows / (1 + Discount Rate)^t). Higher rates = lower present value.
- Example: A 3 percent bond issued at par (100) trades at 95 if new bonds yield 4 percent, creating unrealized losses for existing holders.
SVB’s Collapse: A Timeline of Mismanagement
Background:
- SVB’s Niche: Banker to tech startups (75% of U.S. VC-backed firms were clients).
- Balance Sheet (2022):
- Assets: 43% held-to-maturity (HTM) bonds (long-term Treasuries), 35% loans.
- Liabilities: 88% deposits (41% non-interest-bearing).
The Crisis Unfolded:
- March 8, 2023: SVB sold 21BinHTMbondsata21BinHTMbondsata1.7B loss to meet withdrawals.
- March 9: Panic-driven withdrawals hit $42B (25% of deposits). Stock plunged 60%.
- March 10: Regulators shut SVB, marking the largest U.S. bank failure since 2008.
- March 12: Fed launched BTFP, allowing banks to borrow against bonds at par value (not market value).
- March 13: HSBC acquired SVB UK for £1 (tangible equity: £1.4B).
Why it happened
- “Borrow Short, Lend Long” Mismatch:
- SVB parked deposits in long-term bonds (low liquidity) while offering easy withdrawals.
- Fed rate hikes slashed bond values, creating $17B+ in unrealized losses.
- Tech Sector Crunch:
- Startups burned cash amid funding droughts, forcing large withdrawals.
- Self-Fulfilling Panic:
- SVB’s bond sale exposed vulnerabilities. Institutional investors (like Vanguard and BlackRock) fled, triggering a death spiral.
Systemic Risk? Contrasting 2008 and 2023
| Factor | Lehman Brothers (2008) | SVB (2023) |
|---|---|---|
| Trigger | Subprime mortgage defaults | Fed rate hikes + liquidity run |
| Contagion | Global credit freeze | Regionalized to tech/VC sector |
| Regulatory Response | Slow (TARP passed post-collapse) | Swift (BTFP within 48 hours) |
| Market Impact | S&P 500 fell 57% (2007–2009) | S&P 500 dipped 2% (March 2023) |
Why SVB Isn’t Lehman 2.0:
- Limited interconnectedness (SVB lacked Lehman’s $600B derivatives book).
- BTFP’s “bazooka” effect stabilized regional banks (e.g., First Republic).
Broader Implications
- Systemic Risk? Likely Not:
- Unlike Lehman Brothers (2008), SVB’s collapse is contained. The Fed’s swift BTFP calmed markets.
- Regulatory Lessons:
- Banks must stress-test for rate hikes.
- Deposit insurance limits ($250k in the U.S.) leave large corporate deposits vulnerable.
- China’s Takeaway:
- China’s newly established Financial Supervisory Administration signals stricter oversight, potentially stabilizing markets.
A Darkly Ironic Footnote
SVB’s CEO, Joseph Gentile—formerly Lehman Brothers’ CFO—reportedly urged Wall Street allies to “support” the bank during the crisis. Instead, firms like Goldman Sachs and Morgan Stanley quietly pulled deposits. Gentile himself cashed out $5M in stock days before the collapse.
The Punchline:
Who Lost? Employees, startups, and anyone who trusted “too big to fail” rhetoric.
Who Won? Short-sellers and vulture funds.
Conclusion: A Wake-Up Call for Risk Management
SVB’s collapse underscores the perils of complacency in a rising-rate era. For investors:
- Diversify holdings (avoid overexposure to rate-sensitive assets).
- Monitor liquidity metrics (loan-to-deposit ratios, HTM exposure).
While SVB’s collapse isn’t another Lehman moment, it exposes fragility in a high-rate world. For retail investors like me, it’s a stark reminder: In finance, no one’s your friend—only your interests align until they don’t.
References:
- Federal Reserve Bank of St. Louis (FRED) data on bond yields.
- SEC filings, SVB Financial Group 2022 Annual Report.
- Financial Times, Wall Street Journal coverage of SVB collapse.
Key Takeaways for Readers
- Rate Sensitivity: Banks with long-dated bonds face existential risks in tightening cycles.
- Deposit Behavior: Non-interest-bearing deposits are flighty—liquidity coverage ratios matter.
- Regulatory Gaps: Global frameworks lag behind modern liquidity risks.
Stay vigilant, stay informed.
This article was wrote on March 15, 2023 by Diffie. The author use Deepseek to translate.
Original article is below:
A Wanderer’s Reflection 
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