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HOT TOPIC | Silicon Valley Bank

Silicon Valley Bank went under with astounding speed on Friday.

Established in 1983, by the end of 2022, Silicon Valley Bank (SVB) had a 40-year history, and was regarded as the 16th-largest bank in the United States, with over $200 billion in assets and $340 billion in client funds. Its main objective was financial assistance to fast-growing startups, particularly those in the technology and healthcare industries. It was the banking partner to nearly half of the US venture technology start-up companies. California-based SVB was the go-to for small businesses, who typically find it difficult to access affordable banking services. It also has operations in Canada, China, Denmark, Germany, Ireland, Israel, Sweden and the United Kingdom.

Due to historically low borrowing costs and a boom in demand for digital services brought on by the pandemic, the technology sector has experienced explosive growth in recent years, which has greatly benefited SVB.

In the era of almost zero interest rates, SVB invested billions, like many other banks, in US government bonds. As the Federal Reserve aggressively increased interest rates to contain inflation, what initially appeared to be a safe bet quickly unravelled. When interest rates rise, bond prices fall, so the spike in rates reduced the value of SVB's bond portfolio. According to Reuters, the portfolio was yielding an average 1.79% return last week, significantly lower than the 10-year Treasury yield of around 3.9%.

In addition, and as a result of the Federal Reserve’s rate hikes, tech startups had to put more money toward debt repayment, while – at the same time - they were having trouble finding new venture capital funding . A tougher operating environment for Venture Capital firms led them to withdraw deposits, compelling them to use deposits held by SVB to pay for operations and expansion.

SVB launched a capital raise, but this caused panic. On 9 March, SVB saw withdrawals of around $42 billion; the next day the bank was taken over by the Federal Deposit Insurance Corporation (FDIC).

On Sunday, 12 March, the New York-based Signature Bank, a significant bank for the cryptocurrency industry, was also shut down by regulators; and last week Silvergate, a bank that supported cryptocurrencies, failed.

As a result, many people became anxious In the US all bank deposits, up to $250,000, are insured and would typically be available. Nevertheless, only a small portion of SVB client deposits over $250 000 would typically be reimbursed as the bank's assets are liquidated and the vast majority of client deposits are not insured. Following the collapse of its parent company, the Bank of England in the UK immediately issued a warning that the UK arm of the SVB would become insolvent. Over the weekend, hedge funds offered depositors between 55 and 75 cents on the dollar to "buy" their deposits, which is an important indication of potential losses to large investors.

However, this all became irrelevant on Monday morning when the US Federal Deposit Insurance Corporation (FDIC) guaranteed that all Silicon Valley Bank US depositors would be fully reimbursed.

After placing six US banks under review for possible credit rating downgrades on Tuesday, the US credit rating agency Moody's Investors Service lowered its outlook for the entire US banking industry.

US President Joe Biden assured Americans on Monday that that they “can rest assured that our banking system is safe,” adding: “We will do whatever is needed on top of all this.”

HSBC stepped in on Monday to rescue SVB UK from bankruptcy, they bought SVB UK for £1 ($1.2), securing the deposits of British tech companies. If a buyer was not found, SVB UK would have been placed into bankruptcy by the Bank of England.

The speed and magnitude of this interest rate cycle is beginning to hurt.

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