How the 2023 SVB Financial Crisis Differs from the 2008 Financial Crisis

The financial crisis of 2008 is a moment that will be etched in the memories of many people around the world. It was a time of great uncertainty, and many people lost their homes, jobs, and savings. Fast forward to 2023, and we are facing another crisis, but this time, it is different. The SVB Financial Group's situation is not the same as the 2008 financial crisis, and in this article, we will explore the reasons why.

Firstly, let's understand the causes of the SVB Financial crisis. During the post-pandemic period, liquidity flowed like wildfire, supported by government support programs and extremely accommodative central banks. Asset prices tend to inflate when there is so much liquidity. A bank like SVB, which had Silicon Valley startups as its main customers, received a flood of money, mainly deposited by its customers. This money represents a liability for the bank. SVB took the money and invested it in US government bonds, one of the safest investments in the world. Since it was also a time of extremely low-interest rates, the customers received zero percent interest by depositing their money in the bank. In contrast, SVB, by investing this money precisely in US government bonds, could count on a return of more than 1 percent.

The problem arose in 2022 when the US Federal Reserve began one of the fastest and strongest interest rate hikes ever to fight inflation, going from 0.25% to 4.75% in just over a year. As a result, SVB's investments in US government bonds fell by 20-30%. When startups needed to raise money in this new environment, they went to the bank to get it, which triggered a liquidity problem. When people rushed to the bank to get their money back, the bank had to sell its investments, and it all blew up.

Now let's explore why the SVB Financial crisis differs from the 2008 financial crisis. One reason is lower bank leverage. In 2008, banks had $23 of deposit liabilities for every $1 of liquidity, an absurd level of leverage. Today, in light of that financial tragedy, the ratio is 5x or 6x. Another reason is safer investments. Back in 2008, banks as a whole had a credit problem and were not investing in US Treasuries as they are now. In contrast, SVB invested in US government bonds, which are considered one of the safest investments in the world. Lastly, the Fed's timely intervention to provide liquidity to the banks is another factor. The Fed's support ensures that one bank's crisis does not become a systemic risk, which was not the case in 2008.

In conclusion, the 2023 SVB Financial crisis is not the same as the 2008 financial crisis. While both crises involved liquidity problems, the current situation is more manageable due to lower bank leverage, safer investments, and Fed support. Despite the crisis, the stock market has presented some good buying opportunities. By understanding the differences between the two situations, investors can make informed decisions and navigate the market with greater confidence.