On March 10th, EST, due to insufficient liquidity and insolvency, Silicon Valley Bank, which has been ranked 16th in the United States for 40 years, declared bankruptcy. As an established bank providing investment and financing services for PE/VC and technology enterprises, with a registered capital of only $5 million, it has transformed itself into a well-known technology bank, and now it has gone bankrupt and liquidated.

Why did Silicon Valley banks come to this situation? Does it cause systemic risk?

With the collapse of Silicon Valley banks, US bond yields have recorded their biggest decline since 2008. Due to market concerns that Silicon Valley banks may be the first domino to fall in the new financial crisis in the United States, US bond traders even expect the Federal Reserve to cut interest rates by 25 basis points within the year.

The yield of two-year US treasury bond bonds fell by 30 basis points to 4.57%, closing near the intraday low; The yield on two-year US Treasuries fell nearly 50 basis points in two days, the biggest decline since 2008. In addition, investors also poured into short-term German treasury bond, leading to a sharp decline in short-term German bond yields.

The collapse of Silicon Valley banks is the largest financial institution to fail since the US subprime crisis in 2008, and it is also the first victim of this round of continuous interest rate hikes by the Federal Reserve.

Why did the Federal Reserve raise interest rates and let Silicon Valley banks fail?

The main service target of Silicon Valley banks is start-up small and medium-sized enterprises. The continuous interest rate hikes by the Federal Reserve have made it increasingly difficult for American companies to finance their IPOs, and the cost of financing through other channels has also increased. For many small and medium-sized enterprises, in order to maintain cash flow operations, they have to withdraw deposits from banks, which has transmitted the liquidity crisis to banks.

Silicon Valley banks have more than 170 billion dollars in deposits, and most of their customers are small and medium-sized enterprises. When these enterprises came to Silicon Valley banks to request withdrawal of funds, the Silicon Valley bank run crisis erupted. Therefore, under pressure, Silicon Valley banks have recently had to announce financing, which is tantamount to making their own liquidity crisis public, leading to more customers requesting withdrawals, triggering a classic bank run storm. A customer run triggered a sharp drop in the stock price. After the sharp drop in the stock price, the financing self-help plan of the Silicon Valley Bank was basically aborted. The regulatory authorities immediately intervened and announced the collapse of the Silicon Valley Bank. The Federal Deposit Insurance Corporation of the United States was responsible for subsequent deposit insurance and other matters.

Does the collapse of Silicon Valley banks trigger systemic risks?

After the collapse of banks in Silicon Valley, investors feared that similar things would happen to other financial institutions.

Wall Street analysts are optimistic about whether the Silicon Valley bank explosion has led to a crisis in the entire financial system. They believe that it is unlikely to cause broader banking problems, that the troubles of Silicon Valley banks will not spread in the banking industry, and that the entire industry will not be affected, especially large banks.

Morgan Stanley analysts led by Manan Gosalia stated in their report that the financing pressure faced by SVB Financial Group (SIVB), the parent company of Silicon Valley banks, is very special and should not be considered to have a collateral impact on banks in other regions.

As long as depositors remain intact, the collapse of SIVB, the parent company of Silicon Valley banks, will not pose a risk to the financial system.

No matter how this matter is resolved, depositors should be paid in full, which is absolutely necessary. As long as this is the case, there will be risks to the value of banks' assets, which can be a source of systemic risk.

Currently, the size of Silicon Valley banks is less than one tenth of that of large investment banks, which should be difficult to trigger a financial crisis.

But some venture capital firms have plans to withdraw funds from Silicon Valley banks and urge technology startups to do the same. If banks in Silicon Valley fail, it may have a significant impact on the technology startup industry. Especially in the past year, against the backdrop of major layoffs in Silicon Valley factories, this means that the employment environment for Silicon Valley workers will become even worse.