London (CNN) — Silicon Valley Bank (SVB) went bankrupt last Friday at surprising speed. Investors are now wondering whether its demise could trigger a broader banking meltdown.
The US government stepped in to secure customer deposits, but the SVB slump continues to hit financial markets around the world. The government also closed Signature Bank, a regional bank that was on the verge of collapse, and secured its deposits.
As a sign of the seriousness with which authorities are taking the SVB bankruptcy, US President Joe Biden told Americans on Monday that “you can be assured that our banking system is safe” and “we will do everything whatever is needed above all that”.
Here’s what you should know about the biggest US bank failure since the global financial crisis.
What is the Bank of Silicon Valley?
Founded in 1983, Silicon Valley Bank was, shortly before its bankruptcy, the 16th largest commercial bank in the United States. It provided banking services to nearly half of US venture-backed life sciences and technology companies.
It is also present in Germany, Canada, China, Denmark, Ireland, Israel, United Kingdom and Sweden.
SVB has benefited greatly from the tech sector’s explosive growth in recent years, fueled by ultra-low borrowing costs and a boom in demand for digital services fueled by the Covid-19 pandemic.
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 skyrocketed from $62 billion to $198 billion during that period as thousands of new tech companies deposited their money with the lender. Its global workforce has more than doubled.
Why did it collapse?
SVB’s bankruptcy came suddenly, after a frantic 48 hours as customers withdrew their deposits from the bank in a classic bank stampede.
But the root of its disappearance goes back several years. Like many other banks, SVB invested billions in US Treasuries during the era of near-zero interest rates.
What seemed like a safe bet quickly fell apart when the Federal Reserve aggressively raised interest rates to control inflation.
When interest rates rise, bond prices fall, so the rise erodes the value of the SVB’s bond portfolio. Last week, the portfolio returned an average return of 1.79%, well below the 10-year Treasury yield of around 3.9%, according to Reuters.
At the same time, the Federal Reserve’s rate hike has raised borrowing costs, forcing tech companies to put more money into debt payments. At the same time, they were having difficulty raising new venture capital funds.
This forced companies to draw on SVB deposits to finance their operations and growth.
What triggered the mass withdrawal of deposits?
While SVB’s problems can be traced back to its earlier investment decisions, the run on the bank was triggered on Wednesday when the lender announced it had sold a bunch of loss-making shares and would sell $2.25 billion in new shares to fix its debts. finance.
This created panic among customers, who withdrew their money en masse.
The bank’s shares plunged 60% on Thursday, dragging the shares of other banks with them, as investors began to fear a repeat of the global financial crisis a decade and a half ago.
As of Friday morning, trading in SVB shares was at a standstill and the bank had abandoned its efforts to raise capital or find a buyer. California regulators intervened, closing the bank and placing it in receivership by the Federal Deposit Insurance Corporation (FDIC), which normally means liquidating the bank’s assets to pay depositors and creditors.
What about depositors and investors?
US regulators said on Sunday they would insure all deposits by SVB customers.
The move is aimed at preventing more bank failures and helping tech companies continue to pay their employees and fund their operations.
However, the intervention does not amount to a 2008-style bailout, meaning investors in the company’s stocks and bonds will not be protected.
“Let me be clear that during the financial crisis there were investors and owners of large systemic banks that were bailed out… and the reforms implemented mean we won’t be doing that again,” the Treasury secretary said. Janet said, Yellen told CBS in an interview on Sunday.
“But we care about depositors and are focused on trying to meet their needs.”
Will this trigger a banking crisis?
There are already signs of stress in other banks. First Republic Bank and PacWest Bancorp temporarily halted trading on Monday after shares fell 65% and 52% respectively. Shares in Charles Schwab are down 7% as of 11:30 am ET on Monday.
In Europe, the benchmark Stoxx Europe 600 Banks index, which groups 42 major banks from the European Union and the United Kingdom, fell 5.6% in morning trading, registering the biggest drop since last March.
Shares in Swiss banking giant Credit Suisse fell 9%.
SVB is not the only financial institution whose investments in public debt and other assets have suffered a drastic loss in value.
At the end of 2022, American banks accumulated US$ 620 billion in unrealized losses, that is, assets that have fallen in price 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 qualified financial institutions to prevent the next SVB from collapsing.
Most analysts point out that US and European banks now have much stronger financial cushions than they did during the global financial crisis. They also emphasize that the SVB was highly exposed to the technology sector, which was particularly affected by the increase in interest rates.
“Although the SVB is a huge failure, [él] and other niche players like Signature are unique in the broader banking world,” research analysts David Covey, Adrian Cighi and Jaimin Shah of M&G Investments commented in a blog post on Monday. “So unique, in our opinion, which 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 on Monday to buy SVB’s British subsidiary for £1 ($1.20), securing the deposits of thousands of British technology companies that hold cash with the lender.
Had no buyer been found, SVB UK would have been declared insolvent by the Bank of England, insuring the funds only for customers with deposits of up to £85,000 ($100,000) or £170,000 ($200,000) for joint accounts.
The HSBC bailout is “fantastic news” for the UK’s startup ecosystem, says Piotr Pisarz, CEO of Uncapped, a fintech startup that lends money to other startups. “I think today we can all relax a little bit,” 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 companies, including the technology and life sciences sectors, in the UK and internationally.” .