On March 10, 2023, Silicon Valley Bank collapsed following massive withdrawals from its customers the previous day. The American authorities immediately took possession of the bank and entrusted its management to the American agency responsible for guaranteeing deposits (Federal Deposit Insurance Corp, FDIC). This fall of the Silicon Valley Bank in the United States raised fears of the outbreak of a new global financial crisis. On this subject, the opinions of the specialists are divergent and one fears the effect of contagion in Europe and Africa.
The banking and finance sector under American floodgates has been in crisis since March 10, 2023. According to the “finance for all” news site, Silicon Valley Bank, an American bank specializing in the financing of start-ups up of the new technologies sector went bankrupt. It was, at the beginning of March, the 16th largest bank in the United States, in terms of assets under management. Silicon Valley Bank closed its doors on Friday, March 10: it was the largest bank failure in the United States since September 2008. To understand the causes of Silicon Valley Bank’s collapse, a chronological look back imposed. During 2021, taking advantage of strong enthusiasm following the Covid-19 pandemic, many start-ups carried out significant fundraising. The deposits managed by the Silicon Valley Bank then exploded, from 102 to 189 billion dollars. These liquidities have, in particular, been invested by the bank in US Treasury bonds, an investment that is a priori low risk. The rise in interest rates, a consequence of the tightening of the monetary policy of the Federal Reserve (FED), conducted since the beginning of 2022, had a double effect. On the one hand, corporate financing conditions have deteriorated. This has notably forced start-ups to use the cash they had in the bank. On the other hand, the value of bonds fell significantly in 2022. This phenomenon, sometimes referred to as a “silent crash”, is explained by the negative correlation between the value of outstanding bonds and interest rates. When the latter rise, investors sell their “old” bonds to acquire “new” ones, which causes the price of the former to fall. In this context, the Silicon Valley Bank had to liquidate part of its bond portfolio to cope with withdrawals from start-ups. Due to the fall in the value of the bonds, the bank, which was not protected against the risk of rising rates, recorded a loss of nearly 1.8 billion dollars and, in the process, announced that it wanted to proceed with a capital increase of 2.25 billion dollars. This double announcement triggered a bank panic: many customers, having lost confidence in the bank, withdrew their funds… or tried to do so! US authorities closed Silicon Valley Bank on Friday March 10 to limit the haemorrhage. This situation is attributable to a lack of regulation in the United States. Indeed, any failure of a financial institution raises the question of regulation. After the financial crisis of 2008, stricter regulations were put in place, both in the United States and in Europe. Some of these rules have, however, been relaxed by the Trump administration. In particular, only banking establishments with a balance sheet of more than 250 billion dollars are subject to strict supervision. The threshold was 50 billion before 2017. With the rules previously in force, the American regulator could undoubtedly have intervened upstream and thus avoided the bankruptcy of Silicon Valley Bank, whose balance sheet size was 212 billion dollars at the end of 2022. .
Reactions from US monetary authorities
The American authorities responded quickly in order to reinforce confidence in the American banking system and to avoid any contagion. After taking control of Signature Bank, another bank in difficulty, on Sunday March 12, they announced several measures. First of all, the deposits of Silicon Valley Bank and Signature Bank will be guaranteed in their entirety, well beyond the ceiling of 250,000 dollars, provided for by American legislation. This concerns more than 85% of the customers of these two establishments. The Fed’s action does not constitute a bailout: the shareholders and bondholders of these two banks are not protected by the measures taken. The FED has also set up a new program, the “Bank Term Funding Program”, intended to provide liquidity on favorable terms to banking establishments. Banks will therefore be able to borrow funds by providing bonds valued at their nominal value (and not at their market value). The measures taken by the American authorities aim to avoid any systemic risk, that is to say, the risk that a particular event will lead, by reactions, to a chain of considerable negative effects on the whole of the system which could cause a crisis. general of its operation. Finally, many observers project that the world’s main central banks, such as the FED and the European Central Bank (ECB), could stop their policy of raising interest rates as part of the fight against inflation, so as to support savings.
What consequences in Europe?
American and European leaders continued to be reassuring immediately after the collapse of the Silicon Valley Bank. Thus, according to Bruno Le Maire, Minister of Economy, Finance and Industrial and Digital Sovereignty of France, there is “no risk of contagion” and French and European banks are “solid”. It appears, in fact, that the banks of the old continent operate according to a different model from the Silicon Valley Bank. Their clients and assets are notably more diversified, which limits the risk of facing the same sequence as Silicon Valley Bank. Moreover, there seem to be few direct links between the Silicon Valley Bank and European banking establishments. The fall of the American bank should therefore not generate heavy losses for the latter. On the other hand, European banking establishments are also faced with rising interest rates. They could therefore be led to suffer losses if they are forced to sell the bonds they own prematurely and/or if they have not sufficiently protected themselves against the risk of rising rates. However, if the fall of Silicon Valley Bank should not have serious consequences on the European banking system, the situation of Credit Suisse, one of the main Swiss banking groups, worries. Indeed, Credit Suisse suffered a loss of nearly 7.3 billion Swiss francs in 2022 and announced on Tuesday March 14 that it had revised its accounts for the years 2019 and 2020 due to “substantial weaknesses in its internal control “. According to Credit Suisse, these weaknesses have been corrected, but they should lead to further losses. Concern grew on Wednesday, March 15, after the Saudi National Bank, the largest shareholder of Credit Suisse, said it did not want to invest more in the Swiss group. This cast doubt on his ability to survive. A failure of Credit Suisse, which managed, at the end of 2022, nearly 1,300 billion Swiss francs in assets, according to the bank’s annual report, would, without a doubt, have serious consequences for the European banking system.
Distress in Africa following the bankruptcy of the Silicon Valley Bank!
The setbacks of Silicon Valley, a support for the startup ecosystem, are also being scrutinized on the African continent. If the data is not precise, it is clear that the SVB has a footprint on the continent, through the deposits of certain startups, or through startup investment funds on the African continent. At the announcement of the collapse of the American bank, the reactions of the promoters of African startups were not long in coming. The Tanzanian Benjamin Fernandes, at the head of “Nala Money” recounts his nightmare. “We had most of our money in SVB: Silicon Valley Bank. I transferred everything to another bank. An hour later, it was impossible to connect to SVB. The Tanzanian was not the only one to be panicked. Indeed, if there is no precise data, it seems however that startups from countries such as Egypt, Nigeria or South Africa are more concerned. In these countries, the startup ecosystem is more developed. The more widespread use of the dollar. The placement of their funds in the United States, also a guarantee of security for these startups in the face of fluctuations in their local currencies. Other actors are concerned about possible repercussions on the financing of startups in French-speaking Africa. However, the latter were just beginning to position themselves against the English-speaking giants of the continent. Amadou Sarr, head of the General Delegation for Rapid Entrepreneurship in Senegal, is a tech specialist. He fears that a confusion will quickly be made between the volatility of the financing of the first fundraisings of startups, and the risk of bankruptcy of specialized banks. This would discourage investment. The Ugandan Ham Serunjogi co-founder of “Chipper Cash” goes in this direction. In a press release, he came to the defense of the SVB, stressing the importance of this bank in the ecosystem. Today valued at 2 billion dollars, “Chipper Cash” has however struggled to make its first fundraising. Only the SVB trusted the startup and thus allowed its launch, he says. There is no direct disaster, agree to say various specialists in the sector. However, all eyes are now on the Fed, which has pledged to lend the funds. But when will these funds be released? Because, if startups can operate in the short term, they risk having liquidity problems, if the money remains blocked for a long time.
Jean-Claude KOUAGOU
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