Silicon Valley Bank’s Collapse and Implications for the Tech Industry
On Friday, Silicon Valley Bank collapsed with startling rapidity. Investors are now on edge over the possibility that its demise could spark a wider banking crisis.
The federal government of the United States has guaranteed customer deposits, but SVB’s demise continues to reverberate throughout the global financial markets. The government has also seized and guaranteed the deposits of Signature Bank, a regional bank that was on the verge of collapse.
As an indication of how seriously officials are taking the SVB failure, US President Joe Biden assured Americans on Monday that “our banking system is safe” and added, “We will do whatever is necessary for addition to this.”
Silicon Valley Bank’s Collapse and Implications for the Tech Industry. What you need to know about the largest bank failure in the United States since the global financial crisis.
What exactly is Silicon Valley Bank?
Before its demise, Silicon Valley Bank, which was founded in 1983, was the sixteenth-largest commercial bank in the United States. It provided banking services to almost half of the venture-backed technology and life science companies in the United States.
It also conducts business in Canada, China, Denmark, Germany, Ireland, Israel, the United Kingdom, and Sweden.
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SVB benefited tremendously from the tech sector’s explosive growth in recent years, which was fueled by ultra-low borrowing costs and a surge in demand for digital services caused by a pandemic.
According to financial statements, the bank’s assets, which include loans, more than tripled from $71 billion at the end of 2019 to $220 billion at the end of March 2022. During this period, the lender’s deposits increased from $62 billion to $198 billion as tens of thousands of tech startups deposited capital. Its worldwide workforce has more than doubled.
What caused its collapse?
In a classic run on the bank, customers withdrew deposits from SVB in a frenetic 48-hour period, precipitating the bank’s abrupt demise.
However, its demise can be traced back several years. During the period of near-zero interest rates, SVB invested billions in US government bonds, as did numerous other banks.
As the Federal Reserve aggressively raised interest rates to tame inflation, what appeared to be a safe bet quickly crumbled.
Bond prices decline when interest rates increase, so the increase in rates diminished the value of SVB’s bond portfolio. Reuters reported that the portfolio yielded an average return of 1.79 percent last week, which was significantly lower than the yield on a 10-year Treasury bond, which was around 3.9 percent.
At the same time, the Fed’s rate-hiking spree increased borrowing costs, requiring tech startups to allocate more capital to debt repayment. Simultaneously, they struggled to secure new venture capital funding.
This compelled businesses to withdraw deposits held by SVB to fund their operations and expansion.
Why did the bank run occur?
While SVB’s problems can be traced back to its earlier investment decisions, the bank run began on Wednesday when the lender announced that it had sold several securities at a loss and would sell $2.25 billion in new shares to fill the financial gap.
This caused widespread panic among customers, who withdrew large amounts of cash.
As investors began to fear a repeat of the global financial crisis of a decade and a half ago, the bank’s stock plummeted 60% on Thursday, dragging other bank stocks with it.
By Friday morning, trading in SVB shares had been suspended and the company had abandoned its efforts to raise capital or find a buyer. Regulators in California intervened, shutting down the bank and placing it in receivership under the Federal Deposit Insurance Corporation, which typically involves liquidating the bank’s assets to repay depositors and creditors.
How about investors and depositors?
Sunday, US regulators announced that they would protect the deposits of all SVB customers. The move is intended to prevent additional bank runs and assist tech companies in continuing to pay employees and fund operations.
The intervention is not a bailout in the vein of 2008, so investors in the company’s stock and bonds will not be protected.
“Let me be clear: during the financial crisis, investors and owners of large systemic banks were bailed out… In a Sunday interview with CBS, Treasury Secretary Janet Yellen said, “The reforms that have been put in place mean that we won’t repeat that mistake.”
However, we are concerned about depositors and endeavor to meet their needs.
Will this cause a financial crisis?
Other banks are already showing signs of stress. On Monday, the shares of First Republic Bank (FRC) and PacWest Bancorp (PACW) were temporarily halted after falling 65% and 52%, respectively. Monday at 11.30 a.m. ET, shares of Charles Schwab (SCHW) were down 7.0%.
In Europe, the benchmark Stoxx Europe 600 Banks index, which tracks 42 major EU and UK banks, declined by 5.6% during morning trading, marking its largest drop since March of last year. The shares of the troubled Swiss banking behemoth Credit Suisse fell 9%.
SVB is not the only financial institution whose investments in government bonds and other assets have experienced a precipitous decline in value.
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According to the FDIC, US banks held $620 billion in unrealized losses at the end of 2022. Unrealized losses are assets that have decreased in value but have not yet been sold.
The Fed announced on Sunday that it would make additional funding available to eligible financial institutions to prevent the next SVB from collapsing, indicating that regulators are concerned about a broader financial crisis.
The majority of analysts note that US and European banks now have significantly larger financial buffers than they did during the global financial crisis. In addition, they emphasize SVB’s significant exposure to the technology industry, which has been particularly hard hit by rising interest rates.
Monday’s blog post from M&G Investments’ research analysts David Covey, Adrian Cighi, and Jaimin Shah stated, “While SVB is a major failure, it and other niche players like Signature are unique in the broader banking industry.” From a credit perspective, we do not foresee any significant issues for any of the large, diversified banks in the United States or Europe.
Why did HSBC pay £1 for the UK business?
HSBC intervened on Monday to purchase SVB UK for £1 ($1.2), securing the deposits of thousands of British technology companies that maintain funds at the lender.
If a buyer had not been found, the Bank of England would have declared SVB UK insolvent, leaving customers with deposits of up to £85,000 ($100,000) or £170,000 ($200,000) for joint accounts.
Piotr Pisarz, CEO of Uncapped, a financial technology startup that lends to other startups, described the HSBC rescue as “fantastic news” for the UK startup ecosystem. He told CNN, “I believe we can all relax a bit today.”
CEO of HSBC Noel Quinn stated in a statement that the acquisition “strengthens our commercial banking franchise and enhances our ability to serve innovative and fast-growing companies, including those in the technology and life science sectors, in the UK and internationally.”
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