Why Silicon Valley Bank Collapsed and What It Could Mean

London (CNN) Silicon Valley Bank collapsed with astonishing speed on Friday. Investors are now wondering whether its demise could trigger a wider banking meltdown.

The US federal government has stepped in to guarantee customer deposits, but SVB’s fall continues to reverberate across global financial markets. The government has also closed Signature Bank, a regional bank teetering on the brink of collapse, and guaranteed its deposits.

In a sign of how seriously officials are taking the SVB failure, US President Joe Biden told Americans on Monday that they “can rest assured that our banking system is safe,” adding: “We will do whatever is necessary to in all this.”

Here’s what you need to know about the biggest US bank failure since the global financial crisis.

A Brink’s armored truck sits parked in front of the shuttered Silicon Valley Bank headquarters on March 10, 2023 in Santa Clara, California, United States.

What is Silicon Valley Bank?

Silicon Valley Bank, which was established in 1983, was just before the collapse the 16th largest commercial bank in the United States. It provided banking services to nearly half of all US venture-backed technology and life science companies.

It also has operations in Canada, China, Denmark, Germany, Ireland, Israel, Sweden and the UK.

SVB benefited greatly the technology sector’s explosive growth in recent years, fueled by ultra-low borrowing costs and a pandemic-induced boom in demand for digital services.

The bank’s assets, which include loans, more than tripled from $71 billion at the end of 2019 to a peak of $220 billion at the end of March 2022, according to the annual report. Deposits rose from $62 billion to $198 billion during that period as thousands of tech startups parked their cash with the lender. Its global headcount more than doubled.

Why did it break down?

SVB’s collapse came suddenly after a hectic 48 hours, during which customers withdrew deposits from the lender in a classic run on the bank.

But the root of its demise goes back several years. Like many other banks plowed SVB billions into US Treasuries in an era of near-zero interest rates.

What seemed like a safe bet quickly came to a screeching halt as the Federal Reserve raised interest rates aggressively to tame inflation.

When interest rates rise, bond prices fall, so the jump in interest rates eroded the value of SVB’s bond portfolio. The portfolio returned an average of 1.79% last week, well below the 10-year Treasury yield of about 3.9%, Reuters reported.

At the same time, the Fed’s hike sent borrowing costs higher, which meant tech startups had to channel more cash into repaying debt. At the same time, they struggled to raise new venture capital.

This forced companies to draw on deposits from SVB to finance their operations and growth.

What started the bank run?

While SVB’s problems can be traced back to its past investment decisions, the run on the bank was sparked on Wednesday when the lender announced it had sold a bunch of securities at a loss and would sell $2.25 billion in new shares to plug the hole in its finances.

This set off panic among customers, who withdrew their money in large numbers.

The bank’s stock plunged 60% on Thursday, dragging down other banking stocks as investors began to fear a repeat of the global financial crisis a decade and a half ago.

On Friday morning, trading in SVB shares was halted, and efforts to raise capital or find a buyer had been abandoned. California regulators intervened, shutting down the bank and placing it in receivership under the Federal Deposit Insurance Corporation, which typically means liquidating the bank’s assets to repay depositors and creditors.

What about depositors and investors?

US regulators said on Sunday they would guarantee all SVB customers’ deposits. The move aims to prevent more bank runs and help tech companies continue to pay staff and fund their operations.

However, the intervention does not amount to a 2008-style bailout, which means that investors in the company’s shares and bonds will not be protected.

“Let me be clear that during the financial crisis there were investors and owners of systemic large banks that were bailed out … and the reforms that have been put in place mean that we’re not going to do that again,” Treasury Secretary Janet Yellen told CBS in an interview on Sunday.

“But we are concerned about depositors and are focused on trying to meet their needs.”

Will this trigger a banking crisis?

There are already some signs of stress at other banks. Trading First Republic Bank (FRC) and PacWest Bancorp (PACW) were temporarily halted on Monday after shares fell 65% and 52%, respectively. Charles Schwab (BLACK) the stock fell 7% at 11:30 a.m. ET Monday.

In Europe, the benchmark Stoxx Europe 600 Banks index, which tracks 42 major EU and UK banks, fell 5.6% in morning trade – its biggest drop since last March. Shares in the attacked Swiss banking giant Credit Suisse fell by 9 percent.

SVB is not the only financial institution whose investments in government bonds and other assets have fallen dramatically in value.

At the end of 2022, U.S. banks were sitting on $620 billion in unrealized losses — assets that have declined in value but have not yet been sold, according to the FDIC.

In a sign that regulators are worried about broader financial chaos, the Fed said on Sunday it would make additional funding available to eligible financial institutions to prevent the next SVB from collapsing.

Most analysts point out that American and European banks have much stronger financial buffers now than during the global financial crisis. They also highlight that SVB had a very large exposure to the tech sector, which has been particularly hard hit by rising interest rates.

“Although SVB is a big failure, (it) and other niche players like Signature are quite unique in the wider banking world,” research analysts David Covey, Adrian Cighi and Jaimin Shah at M&G Investments commented in a blog post on Monday. “So unique, in our view, that it is unlikely to create material problems for any of the large diversified banks in the US or Europe from a credit perspective.”

Why did HSBC buy the UK company for £1?

HSBC stepped in on Monday to buy SVB UK for £1 ($1.2), securing deposits from thousands of British technology companies that have money with the lender.

If a buyer had not been found, SVB UK would have been put into insolvency by the Bank of England, leaving customers with only deposits worth up to £85,000 ($100,000) – or £170,000 ($200,000 for joint accounts) – guaranteed .

The HSBC bailout is “fantastic news” for the UK startup ecosystem, said Piotr Pisarz, CEO of Uncapped, a financial technology startup that lends to other startups. “I think we can all relax a little bit today,” he told CNN.

In a statement, HSBC CEO Noel Quinn said the acquisition “strengthens our commercial banking business and enhances our ability to serve innovative and fast-growing businesses, including in the technology and life sciences sectors, in the UK and internationally.”

Leave a Reply

Scroll to Top
%d bloggers like this: