In recent days, we have had a significant number of bank failures in the United States. We had the second biggest bank failure in the United States with the failure of Silicon Valley Bank ; we had the third largest bank failure in the United States with the failure of the Signature Bank, second only to Washington Mutual , which failed in 2008 during the subprime crisis.
What does this have to do with the Brazilian investor? What risks does the Brazilian investor run?
To answer these questions, I will bring here a more technical analysis: a bond evaluation . I will try to understand and draw a parallel of what may have happened and what were the decisions that led Silicon Valley Bank to bankruptcy.
Searching for some newspaper reports, I found information on the Valor Econômico website that the bank's portfolio allocated to long-term US government bonds was 21 billion, with an average return of 1.79% per year. While currently, 10-year US Treasury bonds of the same duration would be paying around 3.9% per annum. What happens is that Silicon Valley Bank , according to the news in the newspaper, had to sell these papers at a loss.
Gathering some facts, let's make a calculation of how all this must have worked for them and try to understand what happened in the bank's treasury. Let's use the financial formulas , more specifically the future value formula. And if we perform some calculations, which you can find in more detail in the video of this article, we see that Silicon Valley Bank suffered a good discount on its portfolio of long-term securities.
If we consider the size of the bank's portfolio, which was estimated at US$21 billion, we find an estimated loss of US$3.2 billion. When we observe that the bank was trying to recover this loss and issue new shares worth 2.25 billion, taking into account the total asset portfolio which was US$209 billion, we realized that this loss alone would not explain the bank's failure , as they lost just under two percent of their total equity.
So why did Silicon Valley Bank fail?
Apparently, reading the reports and news, all investors were advised to withdraw money from investments in the bank. So, the bank was left without capital, while the regulatory agency in the United States decided to take it out of trading and decree its bankruptcy. The agency's quick action is mainly due to two reasons: after the subprime crisis in 2008, they learned their lesson and are more attentive now. The second reason is due to the fact that a few days before, SilverGate , which was a bank focused on cryptocurrencies , had gone bankrupt and which had left the agency in a state of full alert.
Let's talk a little about Brazilian fintechs and what risk do I see they could represent for a Brazilian investor?
To say that the risk is zero would be a lie, because there is a risk of another bank failing in the sequence and investors becoming very fearful and deciding to withdraw their investments, selling their shares and leaving the banks without liquidity, which could lead the market to enter in crisis. However, when we look at Brazilian fintechs , I very much doubt that they have made any long-term investments with a return as inadequate as that of Silicon Valley Bank . Remembering that Silicon Valley only made this type of investment because the US government issued a trillion dollars there in 2008, practically at zero cost, so they could afford to make low-return investments.
Brazilian fintechs are companies that are growing, leveraging business, increasing revenues and I believe they have much more interesting internal projects, with much more attractive rates . Therefore, the greatest risk that falls on them is the systemic risk , the risk of the market running out of liquidity and the banking market entering a spiral of withdrawals.
Video link on Youtube:
https://youtu.be/ZuppbpLtqLk