Silicon Valley Bank collapsed with astounding speed on Friday. Investors are now on edge about whether its demise could spark a broader banking meltdown.
The US federal government has stepped in to guarantee customer deposits, but SVB’s downfall continues to reverberate across global financial markets. The government has also shut down Signature Bank, a regional bank that was 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 Monday that they “can rest assured that our banking system is safe,” adding: “We will do whatever is needed on top of all this.”
Here’s what you need to know about the biggest US bank failure since the global financial crisis.
What is Silicon Valley Bank?
Established in 1983, Silicon Valley Bank was, just before collapsing, America’s 16th largest commercial bank. 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 United Kingdom.
SVB benefited hugely from the tech 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 financial statements. Deposits ballooned from $62 billion to $198 billion over that period, as thousands of tech startups parked their cash at the lender. Its global headcount more than doubled.
Why did it collapse?
SVB’s collapse came suddenly, following a frenetic 48 hours during which customers yanked 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, SVB ploughed billions into US government bonds during the era of near-zero interest rates.
What seemed like a safe bet quickly came unstuck, as the Federal Reserve hiked interest rates aggressively to tame inflation.
When interest rates rise, bond prices fall, so the jump in rates eroded the value of SVB’s bond portfolio. The portfolio was yielding an average 1.79% return last week, far below the 10-year Treasury yield of around 3.9%, Reuters reported.
At the same time, the Fed’s hiking spree sent borrowing costs higher, meaning tech startups had to channel more cash towards repaying debt. At the same time, they were struggling to raise new venture capital funding.
That forced companies to draw down on deposits held by SVB to fund their operations and growth.
What sparked the bank run?
While SVB’s problems can be traced back to its earlier investment decisions, the run on the bank was triggered Wednesday when the lender announced that 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.
That set off panic among customers, who withdrew their money in large numbers.
The bank’s stock plummeted 60% Thursday and dragged other bank shares down with it as investors began to fear a repeat of the global financial crisis a decade and a half ago.
By Friday morning, trading in SVB shares was halted and it had abandoned efforts to raise capital or find a buyer. California regulators intervened, shutting the bank down and placing it in receivership under the Federal Deposit Insurance Corporation, which typically means liquidating the bank’s assets to pay back depositors and creditors.
What about depositors and investors?
US regulators said Sunday that they would guarantee all SVB customers’ deposits. The move is aimed at preventing more bank runs and helping tech companies to continue paying staff and funding their operations.
The intervention does not amount to a 2008-style bailout, however, which means investors in the company’s stock 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 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 in First Republic Bank (FRC) and PacWest Bancorp (PACW) was temporarily halted Monday after the shares plunged 65% and 52% respectively. Charles Schwab (SCHW) stock was down 7% at 11.30 a.m. ET Monday.
In Europe, the benchmark Stoxx Europe 600 Banks index, which tracks 42 big EU and UK banks, fell 5.6% in morning trade — notching its biggest fall since last March. Shares in embattled Swiss banking giant Credit Suisse were down 9%.
SVB isn’t the only financial institution whose investments into government bonds and other assets have fallen dramatically in value.
At the end of 2022, US banks were sitting on $620 billion in unrealized losses — assets that have decreased in price but haven’t been sold yet, according to the FDIC.
In a sign that regulators have concerns about wider financial chaos, the Fed said Sunday that it would make additional funding available for eligible financial institutions to prevent the next SVB from collapsing.
Most analysts point out that US and European banks have much stronger financial buffers now than during the global financial crisis. They also highlight that SVB had very heavy exposure to the tech sector, which has been particularly hard hit by rising interest rates.
“While SVB is a major failure, [it] and other niche players like Signature are quite unique in the broader 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 point of view.”
Why did HSBC buy the UK business for £1?
HSBC stepped in Monday to buy SVB UK for £1 ($1.2), securing the deposits of thousands of British tech companies that hold money at the lender.
Had a buyer not been found, SVB UK would have been placed 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 rescue is “fantastic news” for the UK startup ecosystem, said Piotr Pisarz, the CEO of Uncapped, a financial tech startup that lends to other startups. “I think we can all relax a bit today,” he told CNN.
In a statement, HSBC CEO Noel Quinn said the acquisition “strengthens our commercial banking franchise and enhances our ability to serve innovative and fast-growing firms, including in the technology and life science sectors, in the UK and internationally.”