SVB was founded in 1983 and has played a pivotal role in the development of the Silicon Valley ecosystem. It grew to become the 16th largest bank in the US (worth over $200 billion), and helped to finance some of the largest tech companies on the planet. This collapse is the largest in US finance history since the 2008 failure of Washington Mutual.
In 2021, during the aftermath of the COVID-19 pandemic (which was initially disastrous commercially) there was a great deal of activity in the growth of tech related products and services – especially within start-ups. SVB held the assets of many of these growing companies, and invested a large percentage of those deposits in US government bonds (including many backed by mortgages) over the course of 2021-22. Most would view these investments as relatively safe and non-volatile.
Moving into 2023, the Federal Reserve, however, would soon begin to dramatically increase interest rates in an effort to tame inflation. This hit SVB hard on two fronts – first, the higher costs of borrowing slowed the growth of many tech start-ups (upon which SVB heavily relied). Second, and more importantly, it seems, SVB’s investment in bonds would be catastrophic, since bonds have an inverse relationship with interest rates – in other words, if interest rates go up (as they were now doing), bond values went down. As a result, SVB was starting to experience heavy potential losses.
Sitting on potential losses is not necessarily a major issue – providing that you have time to recover by waiting for the investments (bonds, in this case) to mature. In this worsening economic climate, however, SVB’s clients began to experience the drying up of venture capital, and so needed to withdraw their money from the bank. SVB panicked at the prospect of not being able to provide the liquidity, and so rushed to sell off its bonds at a loss. On 8th March 2023, SVB sold off $21 billion of bonds (mostly US Treasuries) at a $1.8 billion loss. Ironically, this was the final nail in the coffin – when this information became public, a huge rush to withdraw ensued (much of this activity stemming from companies being advised by venture capital firms to do so). This process is known as a ‘run on the bank’. The stock began to plummet and soon SVB was forced to announce that it would no longer be able to meet regulatory requirements, eventually leading to collapse. The FDIC stepped in on 10th March 2023 to seize assets.
The collapse of SVB initially triggered a major panic on Wall Street. As SVB’s share price dropped, so did the stock of other banks too – leading many to begin fearing a repeat of the financial crisis of 2007-8. The immediate impact, however, will not be as severe – the FDIC (Federal Deposit Insurance Corporation) has stepped in and promised that all insured depositors will receive their money back by Monday 13th April. Furthermore, most economists agree that the financial system as a whole is liquid enough at the moment to withstand the knock taken by the SVB collapse.
There are still, however, serious potential ramifications of the collapse. Regulators around the world are now scrambling to look into the exposure companies based in their countries had to SVB (in other words, how likely this is to cause instability or a domino effect in their own backyard). Rishi Sunak has been particularly vocal about limiting the impact this will have in the UK, for example – the Bank of England stepped in and it was agreed on 13th March 2023 that HSBC would buy the UK arm of SVB in order to protect UK clients. Second, the collapse of SVB will also naturally pose a challenge for those tech companies who relied on the bank – especially coming at a time when many are struggling and enacting huge lay-offs. The fall of a key player in the Silicon Valley financing ecosphere will be a major hit to them. Circle (a cryptocurrency industry company), for example, held $3.3 billion of their reserves for their coin in SVB – the collapse of the latter briefly caused a sharp dip in the value of the former’s coin. The intersection of the tech and finance industries was already hit hard by the recent dramatic collapse of FTX – SVB’s downfall is yet another disaster in this space.
Markets are likely in for a bumpy ride for now, with a great deal of volatility likely to follow (offering both risk and reward to investors). It had also been suggested that this dramatic fall could serve as a warning sign for the tech industry’s possible over-reliance on concentrated, volatile forms of funding. The collapse of SVB being partially down to recent increases in interest rates also means that central banks may pause hikes for now. On the whole, it is likely to be a little longer before we see the long-term impact of this monumental collapse.
By Declan Peters
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