The collapse of Silicon Valley Bank (SVB) in March 2023 was a major shock to the global financial system. As a key player in tech-focused banking, SVB’s collapse had far-reaching consequences, including significant losses for investors, job losses, and a major liquidity crisis.
Founded in 1983, SVB quickly established itself as a leader in tech-focused banking, offering financial services and venture capital to startups and other tech companies.
With offices in major cities around the world, SVB’s reputation grew in tandem with the booming tech industry.
However, in the months leading up to its collapse, SVB began to take on more risky loans and investments, in an effort to remain competitive with other tech-focused banks and venture capital firms.
This strategy, coupled with a lack of effective risk management, would ultimately lead to the bank’s downfall.
In early March, the bank told investors that it sold $21 billion worth of common equity and preferred convertible stock to fill its funding hole at a $1.8 billion loss and was seeking to raise additional capital amid a decline in deposits.
Its shares immediately plummeted, ending the trading on the day down 60%, as investors fretted that the deposit withdrawals might push it to raise even more capital.
However, some SVB clients pulled their money from the bank on the advice of venture capital firms, spooking investors and causing the capital raising effort to collapse.
SVB scrambled to find alternative funding, including through a sale of the company, but it ultimately failed.
Reasons for the Collapse
Rumors of trouble at SVB had been circulating for several weeks before the bank finally announced its losses in early March.
Several factors contributed to SVB’s failure, including:
- The U.S. Federal Reserve (Fed) raising interest rates and souring the risk appetite of investors.
- SVB did not have enough cash on hand, so it started selling some of its bonds at steep losses, spooking investors and customers.
- The news caused a run on the bank, as investors and clients began withdrawing their funds en masse.
- SVB’s clients tended to have much larger accounts, which meant the bank run was swift.
- SVB’s failure came on suddenly, following a frenetic 48 hours during which customers yanked deposits from the lender.
- Some SVB clients pulled their money from the bank on the advice of venture capital firms such as Peter Thiel’s Founders Fund, Reuters reported.
- Major investors such as General Atlantic were spooked that SVB had lined up for the stock sale, and the capital raising effort collapsed.
- Other banks and financial institutions that had invested in SVB or held SVB assets began to experience significant losses in a short period of time.
Interest Rate Hikes a Major Factor
As the Fed continued to raise interest rates in its months-long battle against record inflation, the cost of credit for banks increased, and the market value of older, lower-paying government bonds and mortgage securities fell.
When the Fed raises interest rates, existing loans become less valuable, and the cost of being a bank increases.
This can lead to a bank run, where clients move their money to other banks, and the bank has to liquidate loans that are less valuable, creating a gap in its balance sheet.
In the case of SVB, the bank had assets that made sense at the time, but when the Fed raised interest rates, the existing loans became less valuable, and the bank had to liquidate loans that were less valuable, creating a gap of about $1.8 billion in its balance sheet.
Aggressive tightening can lead to a decrease in the market value of a bank’s assets, as was the case with SVB.
Fed to the Rescue
The Federal Deposit Insurance Corp. (FDIC) broke with normal policy to guarantee that all customers could get their money back from the collapsed SVB and Signature Bank to prevent wider panic.
Experts pointed to a handful of regional banks that took risks similar to the failed lenders and could be in danger so the Fed offered funding to help shore up banks’ cash reserves and avoid another damaging bank run.
If needed, the Fed also asserted it has the ability to make additional funding available to eligible depository institutions to help assure banks have the ability to meet the needs of all their depositors.
The additional funding would be made available through the creation of a new Bank Term Funding Program (BTFP), offering loans of up to one year in length to banks, savings associations, credit unions, and other eligible depository institutions pledging U.S. Treasuries, agency debt, and mortgage-backed securities.
Shockwaves from SVB’s collapse reverberated around the world, as global stock markets experienced significant losses, and, in addition:
- The tech industry was hit particularly hard, as many startups and other tech companies that had relied on SVB for financing were suddenly left without an additional lifeline.
- The collapse of SVB led to the seizure of its assets as well as Signature Bank’s assets, the private-sector bailout of the U.S. regional lender First Republic Bank, and the takeover of the troubled Swiss bank Credit Suisse by its rival, UBS.
- The collapse also led to the shutdown of Signature Bank, a regional bank that was teetering on the brink of collapse and guaranteed its deposits.
- The collapse of SVB could lead to a loss of confidence, tougher regulation, and investor skepticism about the financial health of smaller banks that were seen as adequately capitalized after regulators forced banks to hold more capital in the aftermath of the 2008 crisis.
SVB’s failure also raised concerns about the stability of the overall U.S. economy and its influence on the global banking system.
Governments and central banks around the world responded quickly to the crisis, implementing a range of measures designed to stabilize the financial system.
SVB’s collapse led to a cash crunch for startups, with at least 200 UK tech companies at “serious risk” from the collapse of the British division of Silicon Valley Bank.
Prime Minister Rishi Sunak and Chancellor Jeremy Hunt held emergency talks with the governor of the Bank of England to come up with a cash lifeline for affected firms as the bank goes into insolvency.
In response to the crisis, the Bank of England issued a statement addressing concerns and reiterating, “the UK banking system is resilient, maintaining robust capital and strong liquidity positions.”
The Bank also said the Financial Policy Committee (FPC) will continue to monitor developments closely, in particular for the risk that indirect spillovers impact the wider UK financial system.
EU Still in “Good Shape”
According to the European Commissioner for Financial Stability, Mairead McGuinness, the recent collapse of SVB in the U.S. is not expected to have a significant impact on EU markets.
McGuinness stated during a meeting with lawmakers last month that the EU banking sector is still in good shape, despite the recent failure of SVB, as well as two other U.S. banks, Silvergate and Signature.
The three banks failed due to the decline of the U.S. crypto and tech sectors, followed by liquidity traps resulting from their inability to repay corporate clients’ deposits, according to McGuinness.
The banks invested their deposit money to purchase long-dated assets, which lost a significant portion of their value once the U.S. Fed raised interest rates.
This financial strategy is only sustainable if banks manage their risks by hedging, which these three banks did not do.
Although the reaction of EU markets was initially negative, it has since stabilized.
The European index of banking shares (SX7P) fell by 7%, leading to an estimated loss of over $126.5 billion (€120 billion) in market value in the week following the collapse, according to Reuters.
Several Companies Directly Affected
Stitch Fix, an online styling service firm, anticipates that its $40 million credit line with SVB will not be available due to the bank’s collapse.
Circle, a U.S. cryptocurrency firm, says $3.3 billion of its $40 billion of USD Coin reserves were at SVB.
Trustpilot Group PLC, a Danish firm that runs a global review platform, says SVB UK was its principal banking partner, with $36 million held in the bank and $18 million currently in transfer out of SVB UK but pending confirmation.
The biopharmaceutical company says it has $26 million of deposits at SVB U.S. and expects to not bear any losses on these deposits.
Big Tech Hit Hard
SVB’s closure has also led to worries about the future of tech-laden Silicon Valley innovation.
Before its failure, SVB was a key player in the startup ecosystem, facilitating meetings of entrepreneurs and backing startups and other technology companies that traditional banks might shy away from.
SVB was the 16th largest bank in America and the bank of choice for tech startups and big-name venture capitalists.
The collapse also had significant knock-on effects on other banks and financial institutions, as SVB’s holdings in these institutions began to unravel.
There Were Some Winners
Short sellers made a one-day mark-to-market profit of roughly $513 million on short bets.
SVB’s stock fell by 60% and another 63% in premarket trading the next day before being halted, with the FDIC ultimately announcing that it had seized the bank.
The collapse of SVB gave short sellers a windfall profit, but they now face the challenge of closing their positions and realizing their mark-to-market profits.
SVB’s failure highlights the debate about whether short sellers are market watchdogs or opportunistic investors who profit from others’ misery.
Some short sellers had accurately warned the markets that SVB was being dangerously mismanaged in the months before the collapse.
However, once the collapse happened, shorts with various motives started targeting other banks.
Some short sellers reject suggestions that they are partly to blame for the crisis but March’s banking chaos gave shorts their biggest profits since the financial crisis of 2008.
A Cautionary Tale
The demise of SVB is a stark reminder that things can go very wrong, very quickly.
Even though some short sellers profited from its failure, the collapse of SVB has highlighted the importance of risk management and the need for banks to have enough cash on hand to weather a crisis.
The broader banking sector is still likely to be healthy in the long term, according to bank analysts at Morgan Stanley.
However, the collapse of SVB has shown that even the most prominent lenders in the start-up ecosystem are never immune to imminent failure.
The views expressed in this article are not to be construed as personal advice. You should contact a qualified and ideally regulated adviser in order to obtain up to date personal advice with regard to your own personal circumstances. If you do not then you are acting under your own authority and deemed “execution only”. The author does not accept any liability for people acting without personalised advice, who base a decision on views expressed in this generic article. Where this article is dated then it is based on legislation as of the date. Legislation changes but articles are rarely updated, although sometimes a new article is written; so, please check for later articles or changes in legislation on official government websites, as this article should not be relied on in isolation.
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