A lot can happen in the short span of a weekend, as we realized when regulators shut down Silicon Valley Bank (SVB) last Friday in the largest U.S. bank failure since the 2008 financial crisis.
Founded in 1983, Silicon Valley Bank was based in Santa Clara, California, close to the well-known innovation area and the tech startups it specialized in serving. It provided financing for almost half of US venture-backed technology and life science companies.
Although being less known outside of Silicon Valley, SVB was among the 20 largest American commercial banks, with $209 billion in total assets at the end of 2022, according to the FDIC.
What caused SVB to be shut down?
The closure of SVB was due to a bank run that got triggered due to a combination of several factors:
The Federal Reserve continued to raise interest rates to tame inflation, which as a result slowed down the economy and momentum of tech stocks that had founded SVB.
The effect of higher interest rates eroded the value of long-term bonds that SVB had in its balance sheet (SVB’s $21 billion bond portfolio was yielding an average of 1.79% while the current 10-year Treasury yield is about 3.9%).
Reduced Venture Capital activity forced startups to draw funds held at SVB, which was pressured to sell assets at a loss to free liquidity.
Overall, we can conclude that the failure was mainly caused by mismanagement of the balance sheet, which became a significant issue as the macroeconomic environment turned sour.
The news of SVB selling assets at a loss and the announcement of a $2.25 billion recapitalization triggered the panic, with Venture Capital firms reportedly advising companies to withdraw their money from the bank, effectively resulting in a bank run.
As investors feared a new financial crisis, the panic caused SVB's stock to fall, ultimately leading to the bank's collapse. Regulators stepped in to protect depositors and SVB was taken over by the FDIC, while the Bank of England brokered a deal to sell the UK arm of the bank to HSBC for a symbolic £1. This was necessary to prevent the ripple effect to the wider financial and startup sector.
What does it mean for the industry?
We believe the SBV failure to be more of an isolated case and broader contagion is less likely. Nonetheless, bank stocks dropped heavily across the world. In the US, the KWB banks index, which includes larger lenders, fell 12%, even while the benchmark S&P 500 index of the country’s biggest stocks was trading flat, and Europe’s Stoxx banks index fell 5.6%, with all 22 stocks in the index in negative.
The prompt response of regulators stepping into the matter and coordinating with competitors has managed the initial impact of the collapse reassuring depositors and investors. However, further effects of this event still need to be seen and it is thus important to closely monitor the developments as there remains much uncertainty across the sector.
Weathering the current storm can be challenging. Fincog is here to help you review and mitigate the impact to your organization, whether enhancing your resilience, sourcing new business partners or redefining your operational structures. Download our Banking for Tomorrow report or visit our website to learn more about our services.