Is SVB's Failure Everyone Else’s Problem?

It’s the second largest bank failure in history, behind the 2008 collapse of Washington Mutual. Federal overseers on Friday took control of Silicon Valley Bank , one of the top 20 banks in the US by asset size and a beloved lender to startups when larger banks turned a blind eye.

Many are brushing off the idea that the collapse is a systemic risk to the banking system. That might be true, but some of the largest investors in the financial space think there’s a risk of more casualties in the next 6 to 12 months. Concerns about the future of highflying technology companies and crypto ventures aren’t new. It’s just taken a long time for the market to wake up and realize that there’s a burning problem for the bankers to those industries, too.

As John Wu of the blockchain firm Ava Labs, who’s diversified away from SVB for months, puts it: “This is a classic bank run.”

It’s also an example of the pressures banks face in a rising-interest-rate environment. When SVB Financial Group, the bank’s parent company, started facing significant withdrawals on customer deposits, it had to start selling securities. These are Treasuries and mortgage-backed securities banks typically hold for a long time. The trouble is, as interest rates go up, the market value of such securities goes down. And rates have gone up a lot.

The bond market’s sourness poses an ugly reality for a lot of banks. Over at Bloomberg Television, we’ve shared this chart in particular, which shows the steep, unrealized losses that don’t appear in bank financial statements. Serious market watchers look at this and worry about the smaller banks that have to sell bonds to drum up liquidity to easily pay back depositors.

The problem for SVB and for Silvergate Capital Corp., the crypto-focused bank that said Wednesday it’s liquidating operations, is that they sold securities at steep losses. “What happens when you force a bank to sell some stuff—they’re probably stuck with a bunch of stuff they can’t sell or don’t want to sell because the losses are too steep,” Steven Kelly, senior research associate at Yale School of Management’s program on financial stability, said in a telephone interview.

“It starts on the liability side, and makes us worried about the asset side, and that’s why we’re worried about SVB and not every bank in America,” he said. “The Fed is quite explicitly trying to tighten financial conditions—there’s no reason that this wouldn’t apply to banks.”

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Don’t miss: I wrote earlier this week about Ray McGuire, who left his post as vice chairman of Citigroup to run for New York mayor, now joining Lazard Ltd. as the firm’s president . “This is what I call a long courtship over the past 35 years or so,” McGuire said in an interview. His former boss, Bruce Wasserstein, was once the CEO of Lazard. The “iconic” banker will now be responsible for working with large investors and clients around the world, and importantly, recruiting.

Also, here’s my exclusive with Citigroup CFO Mark Mason, who joined me for his first appearance for Bloomberg Television . He spoke to the worries around interest rates and how the bank is thinking about its own hiring.

—Sonali Basak, Bloomberg News