Don't pity Silicon Valley banks

As the SiliconValley venture capital circle once "darling", SiliconValleyBank (SVB) collapse 48 hours can be said to affect the hearts of countless medical people.

With rumors flying everywhere, depositors, investors, startup teams are getting nervous...

Will the sudden death of SVBS trigger a new storm of butterflies? How does it transfer to the pharmaceutical industry?

Within 48 hours, the pros and pros of the two sides of the industry had a fierce confrontation: some people think that the bank bankruptcy behavior, will directly affect the domestic Biotech financing progress, causing a series of chain reactions; The opposition says it will make no difference.

For a while, a bank flash crash caused by the industry chaos, wanton spread.

Fortunately, the pharmaceutical industry got some temporary relief after Janet Yellen, America's Treasury secretary, approved the FDIC's plan to fix Silicon Valley's banking problems by guaranteeing all deposits.

48 hours flash collapse

To unpack the sudden collapse of SVB, one of the 20 largest banks in the United States with assets of more than $200 billion, the timeline goes back to 2020.

At the beginning of 2020, the "novel coronavirus", a black swan event, swept the world and hit the global economy hard.

The Federal Reserve showed a "fire all the bullets" in one go, 12 days directly cut interest rates to "zero."

"Zero interest rates" may be frustrating for savers, but for banks it is downright fun.

It was at this point that SVBS were getting a lot of savings at almost zero interest rates, mostly from tech startups with a "soft spot" for SVBS.

Between June 2020 and December 2021, deposits in SVBS soared from $76 billion to $190 billion.

With nearly $200bn of "non-interest-bearing debt", SVBS certainly have to put the hot money to work.

However, due to the economic downturn, the demand for financing and loans for many startups is not so strong. What will happen to the unspent $200 billion?

The SVB decided to buy large amounts of risk-free bonds with maturities of one to five years, yielding 1% a year.

The cost is 0%, the price is 1%, so that's a 1% spread. The problem, however, is that many of these risk-free bonds are "hold to maturity".

That is, the principal and interest can only be collected at maturity. If you withdraw early, you will lose not only the interest, but also the principal.

When the economic situation is stable and the economic policy does not fluctuate, the risk of bank run is generally relatively low, which is the reason why the "short debt long investment" mode has been able to exist.

However, when the Federal Reserve continues to raise interest rates, this risk will suddenly "flash".

In 2020, the Fed "fired all its bullets in one go" and cut interest rates to zero.

In 2022, the Fed once again "fired all the bullets", raising rates seven times in a row.

Interest rates in the United States are already 4.5% to 4.75%.

The Fed is happy to shoot bullets, but the banks are not happy.

The risk-free bonds that SVBS buy earn 1% a year. If the cost of capital reaches more than 4%, won't you lose money?

Technology companies suffered an unprecedented winter, the famous investment institution Sequoia gave a speech, reminding all invested institutions to tighten their belts to live, manage cash flow.

These tech companies are having a hard time outside, of course, eating their own surplus food.

These tech companies happen to be loyal depositors of SVBS, and when those depositors continue to withdraw their "non-interest-bearing deposits," the risk of a run arises.

Faced with a huge liquidity crisis, SVBS had to sell some assets to get funding.

Selling "hold" bonds early is a loss. This was triggered by the fact that SVBS sold $21 billion of securities for a loss of $1.8 billion.

As soon as this trigger came out, "run risk" became "run."

The rush of money out of SVB simply crushed it.

SVBS did not struggle at all and declared bankruptcy within 48 hours.

In order to prevent systemic financial risks, the US government acted promptly to nip the crisis in the bud.

On March 12, U.S. Treasury Secretary Janet Yellen gave the FDIC the go-ahead to fix Silicon Valley banks in a way that guarantees all deposits. Starting Monday, March 13, all deposits will be available to customers.

Since then, a wave of thunder events, temporarily come to an end.

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Photo credit: Federal Reserve Board of Governors website

Sympathize with Silicon Valley banks,

unnecessary

In the aftermath of the SVB explosion, there was anxiety, pessimism, sympathy and calls for a government bailout.

Many medical industry and investment circles lamented that the collapse of the banner of SVB was a huge loss for "venture capital group".

In fact, there is a big difference between the SVB flash crash and the Lehman Bank explosion in 2008.

The collapse of SVBS was triggered mainly by the practice of "holding maturing bonds".

There is the inherent risk of "short bond long investment", as well as the policy turbulence of the Federal Reserve raising interest rates once and once again.

The failure of such investment behavior is not in itself worthy of sympathy.

The popular model of SVBS is the "investment and loan linkage" model, that is, sharing the growth of the enterprise while effectively controlling the credit risk. The other model is the deep cooperation with PE/VC, through lending to PE/VC institutions, which then invest.

This is also the reason why SVB can gain the reputation of a scientific innovation enterprise.

This model of SVBS will not die, nor should it.

Down SVBS, believe more SVBS will come out.

And the timely rescue of the US government is based on the recognition of this model.

SVB's Butterfly Storm,

How does it transfer to the pharmaceutical industry?

This risk event wave wave to Chinese biomedicine, the whole conduction path intersection point is, the United States is still the highland of biomedicine innovation.

New drug research and development, international multi-center clinical treatment, BD transaction and commercialization of Chinese Biotech inevitably intersect with the United States, and these American Biotech companies are loyal fans of SVB. As a result, many Chinese Biotech companies with good international performance will inevitably have business contacts with SVB.

Therefore, recently, a number of Hong Kong stock biomedicine and biotechnology companies, such as Gax, Sinochem, Pharmaron, Botten, Pharmaceutical Science and Technology, Pharmatech, Aseng Pharmaceutical, Genting Xinyao, Jiahe Biological, Beigene, Deqi Pharmaceutical, Zeding Pharmaceutical, Tengshengbo Pharmaceutical, Kangfang Biological, Beihai Kangcheng, have issued statements related to capital security.

Most Chinese biomedical companies are barely or to a low degree affected by SVB bankruptcies, but why the widespread anxiety?

First, biomedicine is a "cash burning" industry, which must be financed or able to borrow at low cost in the process of development. The collapse of the flag of SVB is more a collapse of confidence in financing. American enterprise's financing guidance is the vane of our country to a certain extent. The "tech winter" is already on its way.

This time the thunder event is also an epitome of the new normal of the innovative drug market. In the past, it may be difficult to wait for money to come to the door of the good thing, the enterprise must consider self-hematopoietic function. One hand grasp innovation, one hand grasp commercialization, can be more leisurely.

Second, sounded the alarm of financial risk control, cash reserve is the foundation of the survival of enterprises, enterprises should also do a good job in the risk management of funds. In addition to the "technology" attribute, the "financial" attribute also needs to be taken into account. A stable policy environment is important, as is not putting all your eggs in the same basket.

Third, market value management, this time the thunder, a lot of Biotech market value experienced a "roller coaster", but there is nothing to do. Share prices fell in response to the thunder, then recovered after the US government rescued the market. In addition to laments that barometers of US biopharmaceuticals will eventually reflect domestic share price fluctuations, companies need to beef up their ability to cope with market fluctuations to avoid a butterfly effect.

Every time the spiral rises, some enterprises ride the tide and break the waves, while some enterprises turn around and fall into the abyss. If you want to build a lasting career is not easy, roll up your sleeves and work hard!